Jake is the co-founder and CEO of Groundbreaker Technologies, a real estate technology company that he created to help solve the problems he was having when he was investing in real estate. In this episode, you will learn some ways to use technology to improve your real estate investing experience.

“One practice that has really helped me grow is by getting outside of my business by helping other entrepreneurs.” – Jake Marmulstein

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. With us today, Jake Marmulstein. How you doing, Jake?

Jake Marmulstein: I’m doing great, Joe. Thank you for having me.

Joe Fairless: Well, it’s my pleasure and I’m glad to hear that. A little bit about Jake – he’s the co-founder and CEO of Groundbreaker Technologies. They are the sponsor of today’s episode, as you are well aware, and he has over six years of real estate technology experience, he’s based in Chicago. We’re gonna be talking about using technology to your advantage, solving problems with technology, and then also pitfalls when creating a real estate business that he’s seen from a back-office operation standpoint, among other things. So with that being said, first though, Jake, you want to get the Best Ever listeners a little bit more about your background and your current focus?

Jake Marmulstein: Sure. Thank you for the introduction. So Groundbreaker and my background blend together because when I was working in real estate investment, I realized that managing investors in the current way that we’re doing it, at the REIT that I worked in, we were doing institutional scale investments in distressed hotels, and I was doing all the underwriting and packaging of the materials, and then having to get on investor calls and answer investor questions. So through that experience, I realized that the process was pretty manual and there was a large lack of technology, and I wanted to make it better and couldn’t find solutions in the market to address these problems. So that’s where Groundbreaker came into play with my background. And ever since, I’ve been working with real estate syndicators to help them get their business into a digital realm, where they can manage things in a more automated and streamlined way.

Joe Fairless: So you were working at a REIT that was buying distressed hotels, and you said you were responsible for– I think you said underwriting, as well as answering investor questions. What type of questions would be asked by an investor when looking at these types of opportunities?

Jake Marmulstein: The investors would want to know some of the basic things like – what’s the minimum investment amount? Why this asset? Talk to us about the demand generators in the market and the competitive set. Some of the things that you would assume that they would already read in the pitch deck, but maybe they never even looked at what you sent them.

Joe Fairless: So answering those questions would be one aspect of it, and you mentioned that– okay, you saw that there was an opportunity to build technology to address what you were seeing wasn’t automated, but could be. So how does a solution like Groundbreaker help with that process if they’re not reading it in the first place? Is it, “Hey, you’ve got a place to log into and now, here it is right in front of you, and it couldn’t be more obvious that you should check this out”, or are there are other ways that this provides a solution for the challenges that you came across?

Jake Marmulstein: Yeah, this is only one small aspect of it. I remember spending a lot of time also moving files into different folders and organizing the backlog that was our database of information, and not having it all in one place, and managing several different Excel spreadsheets to keep track of contributions and distributions and investor data and the conversations that we had with investors, and having that all really based on Excel in an internal server.

So there’s a wider, larger problem of data storage and just the access to the information that we use to operate the business that causes the problem. But with regard to this specific one, Groundbreaker has a offering memorandum builder inside of it, so you can create your offering and have it live on the internet, and that means that we can track people getting access to the system, logging in and looking at the offering. So when we go to them to call the investors and look at the list of individuals that are most likely to invest, we can pick the people who’ve already looked, and we know for those who haven’t looked, where they’re at, so we can moderate the conversation and maybe they might be a different priority in our list of investors to call, but we go into the conversation with the information that they didn’t actually check out the deal yet.

Joe Fairless: I know that when you look at the backend, back-office operations that need to be present when you create a real estate business – when you talk to others, a lot of times they’re missing some things or they don’t know what they need to have included whenever they create a real estate business. Can you talk about some of the backend office operations that are needed in order to have something up and running?

Jake Marmulstein: Absolutely. So a lot of people are great at finding good opportunities, good deals, because that’s what most people get excited about is the deal. Let’s find that deal and let’s find that great opportunity to invest in and be able to pull the trigger. But before you can scale a real estate investment business appropriately, you may start out with a simple Excel spreadsheet and PowerPoint with a group of friends and family who know you and trust you. But when you want to scale beyond that, you’re going to need to have systems in place to get across your track record and do everything in a compliant way, manage data and track everything. So having a website helps to create transparency about your brand and who you are, and a lot of people spend way too much money and time on the design of a website and that holds them back.

I also find that people will pay a lot of money for operating agreements and getting their entity set up, and it will come out of pocket tens of thousands of dollars before they even have the chance to make any money. So that’s where a lot of people stop, is on that basic stuff. So you need to have your operating agreement in place and your entity in your bank account, and having a website helps you to create a track record and show the history of what you’ve done, and it builds trust and familiarity with you, so that you can have access to new investors, and when people refer business to you, there’s a place for people to go to get information on who you are. So I think all of that helps. And then if you’re able to attach an investor portal into there, which is what Groundbreaker would be able to provide, you have the chance to catch those leads, let them sign up, and then give them access to your deals. So it will create an infrastructure for you as a business, to be able to build trust, do things the right way in a compliant manner and operate in a system that can scale.

Joe Fairless: With Groundbreaker over the years, what are some major things that have evolved since the beginning?

Jake Marmulstein: In terms of–

Joe Fairless: In terms of the product itself.

Jake Marmulstein: In terms of the Groundbreaker product?

Joe Fairless: Mm-hm.

Jake Marmulstein: Sure. So when we started, we were just a fundraising tool. We allowed people to create an offering and share it with investors. And people told us that they wanted to have a private investor base that they could manage in a CRM system, where they could take notes and keep information logged, and upload reports and share information and be able to distribute funds. So we built all of that functionality, and then we made distributions electronic so you can send funds through direct deposit to investors’ bank accounts through the software, and that’s been a huge improvement.

We also have been able to make it easier for people to find information by having the CRM and having all of the information from every investment, every report, K-1, in the same place; so you don’t have to manage different systems to keep track of this data. Groundbreaker can act more like a headquarters for the business, and I think that has really helped a lot of people who might be relying on email or Dropbox to house the data, and so it still creates that problem of inefficiency when information is in different places.

Joe Fairless: What’s been the biggest challenge for getting more customers? Obviously– well, not obviously, but I’d say most businesses, they want more customers. So there’s always gonna be a challenge to getting more and more. So what’s been your biggest challenge in getting more customers?

Jake Marmulstein: Well, I think initially, the challenge was just the realization from the market that this solution is the future and the need for it. I saw it pretty early on that every real estate investment company would, at some point, have an investor portal, and as more companies adopt, the companies that don’t adopt are in a position of weakness. So that’s the market moving and getting in there– identifying the need for an investor portal to be able to offer transparency to their investors in a way that’s never been available before. So as the market gets more educated, Groundbreaker’s here to provide that service, and I don’t see any challenges outside of just getting the word out about what we do and people being educated about why they need to get on board with the solution, because there’s definitely enough companies out there managing things the old fashioned way. They’re not happy with the way that they do things, but they don’t know that there’s something else better out there that they could do.

Joe Fairless: Let’s talk about you as an entrepreneur because as real estate investors, we’re all entrepreneurs in varying degrees. At least, that’s my belief. What’s been the hardest day for you as an entrepreneur?

Jake Marmulstein: That’s a great question. I don’t think there is a hardest day, Joe; I think there’s a lot of hard days. It’s like a rollercoaster ride; some days you feel great and happy in what you’re doing, and some days you really question why you’re doing it. But maybe, I could say when I moved to Chicago and took on the current investors that are helping to help me grow Groundbreaker, that was a really hard day, because I moved from living in Puerto Rico in 2017, and seeing the sun every day, to moving to Chicago in the middle of winter in January. I didn’t have a place to stay, and I was staying in an Airbnb, and I was questioning whether I’d made the right decision or not, because I could see myself taking a major sacrifice in terms of what I wanted and the lifestyle that I wanted to live, because I enjoyed Puerto Rico very much, and I could see myself living there… But making a sacrifice to be able to grow the business and realizing that as an entrepreneur this was a lifestyle change that I was willing to take so that I could achieve something greater and that one day, with hard work and determination, this decision would pay off.

Joe Fairless: Mentally or rather emotionally, in that time period, what do you do to help yourself emotionally? You mentioned your thought process, “Hey, this is why I’ve gotta do”, but did you do anything to help emotionally keep you in good spirits during the dead of winter in Chicago, which is probably the coldest place that I’ve ever been to? It’s miserable, quite frankly.

Jake Marmulstein: Yes, and you’re currently in Ohio, right?

Joe Fairless: I am, but Chicago with that wind and the winter just puts tears on my face involuntarily, and then they freeze on my face; it’s just miserable.

Jake Marmulstein: You should have been here for the polar vortex.

Joe Fairless: Oh, well, I’d rather just hear about it through you. But anything emotionally that you did to help keep your spirits up? And I ask this, because I’m interested in you, but more importantly, for all the Best Ever listeners, if they’re going through something where they take a leap, then maybe what you did to help you emotionally just get through it could be something they could use, too.

Jake Marmulstein: So here’s what’s helped me as an individual get through some of the challenging parts in my life, and it comes from understanding that I’m making a choice for something that’s greater that I believe will pan out in the future, that the sacrifice is necessary to get there, and that if I work hard and I power through, it’s going to be okay, it’s going to be worth it, and I’ll be looking back at the moment, happy that I made that decision.

So there’s a lot of optimism, but then also knowing that I’m putting myself outside of my comfort zone and leaning into that and saying, “I’m outside of my comfort zone and I know this is uncomfortable and I know it’s hard, and this is where growth happens,” because I want to grow personally from anything that I do. Whether it’s true or not, I’m thinking that I’m going to grow, and there’s a good example of that… When I was in college, I went and I lived in Spain, and I didn’t speak any Spanish, and I didn’t know anybody, and I knew that that was an uncomfortable situation, and I had to learn Spanish and find out how to live as a adult in the free world… And that took me a lot of suffering, also mentally and emotionally, to be able to get to a point where I was comfortable. And then this is the same situation. When I moved to Chicago, I didn’t know anybody. I just knew that I would grow from the adversity.

Joe Fairless: It’s embracing it and knowing that there’s something empowering about what you’re doing, and then having the faith to say, “Okay,” as you said, “This is where the growth happens.” That’s so powerful knowing, whether that’s true or not, but if you believe it to be true, then most likely, it will become true that you’re going to grow through the experience and regardless, you’re gonna be better off. It might not be exactly what you thought it would be, the end result, and that’s something I also got from Tim Ferriss… He talks about whenever you enter in the new venture, identify regardless of if it is successful in whatever quantifiable way that you think it should be successful, regardless of that, find ways that you will be better regardless of the actual success of the project. And that way, you’re still going to get something out of the experience, whether or not it’s the actual results you intended is another story.

Jake Marmulstein: A hundred percent. You described it really well. I also– when it was winter, and it was very rough emotionally because of not seeing the sun and not having people to spend time with, I ended up going to the gym a lot, and I think that balancing that positive self-talk and long-term thinking with healthy physical habits to regulate your body and your mental state are necessary.

Joe Fairless: Yeah, and that could easily go the opposite direction easily for someone. If it’s really nasty outside, you stay inside and you do not go work out, and then you gain a bunch of weight.

Jake Marmulstein: Yeah, and you tell yourself as you’re running to the gym, “This is challenging and I hate it, and I love hating it, because it helps me grow.”

Joe Fairless: What a mindset to have, and it can only help us when we think about things that way. Anything else that you think we should talk about as it relates to as an entrepreneur, just some things you’ve learned, or also we talked about pitfalls when creating real estate business, spending too much time and money on a website when you don’t have the other aspects taken care of, or using technology to your advantage based off of your experience working with the REIT, buying distressed hotels? Anything else before we wrap up that you think we should talk about?

Jake Marmulstein: Yeah, I’ll share with folks this last tidbit. I think that it is sometimes really hard to focus on what you’re building when it’s all about what you’re building and it’s all about you. So something that really helps me to remind myself of what I’ve learned and what I’ve been able to do and how I’ve grown as a person is really getting outside of my business, and that’s how I give back. I give back through helping other entrepreneurs and advising them and helping them to think about their ideas.

When I do that, it reminds me of what I know. And even though some days are tough and I don’t get what I want at Groundbreaker, when I can help somebody, it just proves to me how much I’ve learned and what an impact I can make, and I can see it through the impact I make for somebody else. So that’s just something to keep in mind for all of you out there who might be frustrated with your own business, and in a way that you can give back.

Joe Fairless: Service many leads to greatness. I’m really grateful that you mentioned that. You’re probably wondering if I was gonna ask you your best real estate investing advice ever, or best ever advice, but I’m making this a special segment on the weekend. So that’s why I didn’t ask it. I’m glad that you mentioned it proactively. How can the Best Ever listeners learn more about Groundbreaker?

Jake Marmulstein: The best way is to go to groundbreaker.co. We took a lot of time to work on our website and share as much content about us as possible. So you can learn about us at groundbreaker.co.

Joe Fairless: Jake, thank you so much for being on the show. I hope you have a best ever weekend. Talk to you again soon.

Jake Marmulstein: Thank you, Joe.

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Ed Cravo is the Co-Founder and Director of Marketing at Groundbreaker Technologies, Inc. He shares his journey into marketing and shares how Groundbreaker can help investors in their personal business. Ed explains how they can help you do more deals with less work while saving you money on operations and banking. The Groundbreaker software lets you streamline your fundraising, relations, distribution payments, and reporting in one easy-to-use tool.

Ed Cravo Real Estate Background:

Co-Founder and Director of Marketing at Grounderbreaker Technologies, Inc

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Ed Cravo. How are you doing, Ed?

Ed Cravo: I’m doing great, Joe. Thanks for having me. Looking forward to not getting into any fluffy stuff.

Joe Fairless: That’s right. Well, you know the drill then. Best Ever listeners, you know Ed and his company Groundbreaker, because they’re a sponsor of today’s episode, as you are well aware. I’ve gotten to know his team through this process, and I know you’re gonna get a lot of value from this conversation.

So first off a little bit about Ed – he’s the co-founder and Director of Marketing at Groundbreaker Technologies, he’s got over four years of real estate technology experience, he’s based in Chicago. With that being said, Ed, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Ed Cravo: Absolutely. So I started my career in marketing right out of college, joined a search engine optimization company, and I started doing sales there, but just learned the entire marketing business as well, moved on to founding my own marketing company after that. In that marketing company we serviced real estate clients, construction clients, e-commerce websites, etc., and then shortly after that, it was a growing agency, but learning a lot, picking up a lot of skills, shortly after that I joined Jake at Groundbreaker and just started focusing on marketing and sales, and that’s been the story since the last four years.

Joe Fairless: Okay. So what was Groundbreaker when you joined?

Ed Cravo: Groundbreaker, when I joined, was already a software as a service company for real estate investment companies. What it did, and it’s the same mission, the same thing it does today, it helps real estate syndicators automate their day to day activities around fundraising, investor relations, reporting, etc, and elevating their brand as well and giving their investors an investor portal where they can gain access to their data and their investments.

Joe Fairless: How has the product evolved over the four years since you’ve been on the team?

Ed Cravo: That’s a great question, because it has actually evolved a lot. The goals are still the same, but what we learned– we were probably the first company to come out with the solution, and it was a bit more than four years ago; I joined a little bit after the company had already gotten started. What we learned over the first couple of years was that ease of use was extremely important, and as syndicators would provide the software to their investors, it was really important that their investors just loved it at the first try, so that they kept coming back, and that wasn’t always the case in the early days.

So we’re actually on the second version of the software, which we are relaunching or have relaunched most of it already or continuously improving on, and our biggest focus was how can we make this as easy as possible to use, how we can make this easy on the sponsors, how we can make this easy on the LP ambassadors… So that’s why it has evolved a lot. We try to do all of the things we’re doing, but with less clicks and less complication.

Joe Fairless: What are some specific examples of what it used to be from a use case standpoint and what you’re doing now to improve that process?

Ed Cravo: Things are easier to reach now. So for example, in the software, there’s this big search bar at the top – this is on the manager side – and if you want to create a new contact, you used to have to go to your contacts section and then click the plus button and then start filling information in. Now you can just click in the search bar and type ‘create contact’ and the option to go directly to that final location where you add the contact comes up. Same thing for creating new entities, for creating new distributions. So you can still navigate to all the different sections, but now you can navigate to everything by just typing what you want to do at the top. So that’s one specific example, but overall it’s just the user experience as well. Instead of having to click three or four different places to get somewhere, now you can get there with less clicks, less of a learning curve.

Joe Fairless: What are some of the responsibilities that you have with Groundbreaker? You said you’re the director of marketing, you’re the co-founder. What does that mean in terms of a day to day for you?

Ed Cravo: That changes over time.

Joe Fairless: I bet.

Ed Cravo: Yeah… But when I first started four years ago, what I did was I would help new clients get onboarded, as in I would deploy their platform, I would make sure that their logos were in the right place, etc, but at the same time I was doing marketing. I was getting the website set up so that we could start to drive a lot of search engine optimization traffic, which was our big focus in the early days. And that was in the beginning.

Nowadays, I’m mostly trying to develop our inbound marketing in all sorts of ways, whether that’s growing our blog, whether that’s establishing a partnership with you guys, or even setting up for the Best Ever conference, that and the entire thing set up, so that we can come in and try to perform our best while there.

Joe Fairless: You joined an SEO company out of college and you were on the sales team. What did you learn from that experience that you’re applying in your current role?

Ed Cravo: One thing that I didn’t mention with your previous question is also sales. So I have, at times, done too much marketing, to the point that we had enough leads that somebody needed to step into sales. This was years ago. So I jumped into that as well. So I think the things that I learned there, the biggest one was, how do you get a website to the first page of Google for a specific keyword? And that was the most valuable thing I learned earlier on, and of course, that’s an evolving art and science, search engine optimization, but I would say that was one of the biggest, most valuable things I learned early on, that I have applied to Groundbreaker and to any work that I do with marketing.

Joe Fairless: Let’s take a step back and let’s just talk about — is it fair to refer to your service as an investor portal?

Ed Cravo: Yeah, that’s one part of it. Investment management or syndication automation would be fair as well. It’s just we’re building different tools to automate a lot of those day to day activities, but the investor portal is a big part of it. That’s one of the things that our clients are able to give to their LP investors.

Joe Fairless: So let’s just talk about it in that context for just a moment, because I think a lot of the Best Ever listeners think about what you do in terms of an investor portal, and then there’s things underneath that that correspond to the investor portal. So with the investor portal, I can tell you personally, I was not on board for having one for our company because I was concerned about the transition from getting investors in our current deals from nothing, just email updates and no portal, and we would do one-off email responses when they asked to look at distribution histories, and we would manually change their information, whether it’s they moved or whether they just got a different bank account, we’d have to work with them on that… And we would do all that manually.

And I was against it initially, for a long time, because I was concerned with the transition period, because I thought it’d ruffle a lot of feathers with our investors, because now they have to have access to a new website with login information, etc. So what do you say to a syndicator who has those concerns whenever they’re talking to you about jumping on board with Groundbreaker for that solution, for a portal, but they get the same concerns I did?

Ed Cravo: Yes. “What’s this busywork that they’re trying to push on me? Why do I need this?” etc. It’s a really great question. I think we’ve seen the market move. I think 2015 is when we first started to say, “Okay, here is this technology we have.” We were trying to do something else with it at first, but then we started to talk to some real estate syndicators and tell them, “We can give you this in white-label, what do you think?” Some of them were interested and some of them bought it. They cashed in the early days to be able to use this technology. It wasn’t as streamlined to offer as it is today. What we’ve seen over time is that — this is a classic market adoption curve is what we’re seeing. First, there’s that under 2% of the market adopting a new technology. They’re called the innovators or early adopters. And the innovators and early adopters, what they want is they want the latest and greatest. They want the coolest toy, because they think that that’s going to give them a leg up in their competition; and I’m speaking in broad terms here, not just about our technology, and it is true.

The innovators and early adopters are often able to get a leg up on their competition by being the first ones to come out with something that the market’s going to demand later. They’re the first ones and people start talking about them, and maybe in this specific context, the innovator or early adopter, one of your LPs is sitting at dinner with some high net worth friends. And what do high net worth individuals talk about at dinner? Well, many times they talk about what they invest in, or their latest and greatest investment, or their latest and greatest call in the stock market, etc. So they might, at that point, pull up their investor report and be like, “Look, I invest in real estate right through this portal. This is how it works,” and show them right then and there on a tablet or phone. And those are the early innovators.

Joe Fairless: Yeah.

Ed Cravo: The early majority is the next section of the market, and you can look this up on online market adoption curve. The early majority is a big chunk of the market, and that’s where we find ourselves in today, and that’s when the actual LP investors are beginning to ask the syndicators for a portal saying, “Hey, I have a portal with this other syndicator that I work with. Why don’t we have a portal? I’d like to have a portal so I can log in and download my documents, I can log in and see my distributions, what’s coming, what’s past, etc.” So I think, right now, we’re in the market phase where the LPs are beginning to ask for it, and the syndicators themselves are starting to look for it.

We’ve seen the conversation online on LinkedIn, at the Best Ever Conference, where this is a point of focus now in our mind, and I believe it’s pretty clear that as the late majority comes in and the laggards come in – those are the later stages of the adoption curve. Pretty much every real estate syndicator out there is going to have some online experience for their investors. So yes, it’s all about timing, like you said, and yes, it may be a hassle to do it in the beginning, but I think it’s going to become a question of, is this even a choice anymore? Can I even continue to grow my business without these tools that are helping my competitors advance, that are helping the other companies grow faster, it’s helping them do more deals, spend less time, just give their LP investors a better experience in general. Can I afford not to have that? We don’t think that the answer is going to be, “Yes, I can afford to not have that,” for very long.

Joe Fairless: Thank you for sharing that thought process and the market adoption curve. I did a quick Google search, and I was following along with you as you were going through it. I’m actually proud that we’re in the early majority, and that’s when we jumped on board; that we weren’t in the late majority or the laggards. But exactly what you said, LPs started coming to us and saying, “What’s the login to the portal? How can I get access to it?” I’m like, “Well, we don’t have one right now.”

From a general partnership standpoint, as you said, it’s helping the competition with their business. So why not allow it to help us with our business? So I get that, eventually, it’s not even going to be a choice. You just need it. Let’s go back to the root of the question though, that I asked, and that is the transition period that could be painful for limited partners and general partners. So can you talk to us about what that transition period looks like, tactically speaking, and how you make it as pain-free as possible?

Ed Cravo: Absolutely. So without a doubt, introducing a new platform to a new group of people may cause a little bit of pushback, or you may feel that there’s going to be a little bit of pushback. So it’s important to do it right. It’s important to get it right, to plan it appropriately. So the way that is done right now with Groundbreaker is that we call it white glove onboarding. And what that means is that you have a customer success person on our team that is providing you and your LPs with the documentation, the instructions and the training that they will need in order to be able to make this transition over to the new platform.

So where they’re coming from is they’re coming from receiving emails and needing to make phone calls to you to get updates, if that was the case or if you’re providing updates to them via email. So they are still going to be able to receive emails from the general partner, but those emails may be done in an automated fashion through the platform, or they may be done in a scalable fashion (not completely automated) through the platform as well. But in the early days, it’s about training the LPs on how to use the platform, and it’s about training the GP and the GP team on how to not only use the platform, but communicate with the LP investors.

So in our case, specifically, we’re providing our GP clients with the documentation, with the training material that they can pass on to their investors, and then we’re supporting them throughout that entire process. But that brings it all back to the point that I was saying earlier where ease of use, ease of adoption is extremely important for this specific purpose, for that transition period. Let’s face it, many LP investors may not be the most tech-savvy. We’ve got a lot of LP investors who are extremely tech-savvy, and we’ve got a new wave and a new generation of LP investors who are extremely tech-savvy coming into– beginning to manage the family money or the money that they’re making themselves.

So it’s all about being able to offer that high touch support early on if needed, but primarily being able to offer something that does not need that much support in order for somebody to figure out how to use as well.

Joe Fairless: What’s something a competitor of yours offers currently that you do not offer and why?

Ed Cravo: In terms of functionality?

Joe Fairless: Yeah.

Ed Cravo: Let’s see. So Juniper Square is a well-known competitor of ours, and they offer a very robust waterfall modeling functionality. And at this point, we do not have anything as robust, and the reason why is because we just have not caught up with them on that yet.

Joe Fairless: Has there been a big need?

Ed Cravo: Well, everyone does distribution to waterfall. So there is a need for it, and the question is, will people trade the ease of the functionality? There’s still a way to do it through Groundbreaker. It’s not as automated, it doesn’t calculate as automatically, but there’s still a way to do it by uploading the distributions. Now the question is, are people trading the high-end functionality for the price or the price for dealing with the current workaround, which we are saying, “Hey, we’ll get this, we’ll make this better and better. Join us now so that we can grow together”?

Joe Fairless: What’s been something that has surprised you about the users as they experience the platform, whether it’s they spend more time here, or they really focus a lot on certain components of it that we didn’t think were going to be as important, but now we moved our efforts into development into that area – anything like that?

Ed Cravo: I may not be the best person to answer that question, and I do have an answer, but I’m not sure that it’s exactly what we’re asking here, because I’ve already said it, and it’s that the ease of use is such a big deal. Early on, we were really the first ones out there and we were like, “This works. It’s great.” Through the phone, you could almost see their eyes light up. Through the phone, you could almost see that. That was three or four years ago as we gave a demo. But then we just realized ease of use is more important here than any other technology we’ve seen in the past, because of the work that’s been done with the LPs.

Ed Cravo: Oh, my best real estate investing advice ever would be to probably not listen to me on that advice because I’m not — I’m a technology and marketing person.

Joe Fairless: So let’s talk about that. So let me rephrase. Based on your background, as a technology and marketing person who works in real estate, what’s a tip or a piece of advice you have for someone who is focused on technology and marketing in real estate? Just whether it’s an SEO tip, or — you already talked about product adoption curve, which is really interesting, but what’s something based on your background?

Ed Cravo: Okay, now that’s much easier for me to answer. Thank you for rephrasing so that even I can understand it. So I would say two things. Biggest one– so this is specifically for the GPs out there that are trying to attract more LPs or trying to close more deals with LPs – it’s transparency. We’ve learned a lot about transparency recently with one of our mentors. Todd Caponi is the author of the book, The Transparency Sale, and it’s just such a powerful state of mind and mindset to have to be transparent… Because not only is that going to help you gain the trust of your LPs, but it’s also going to help you put forth the best offer that you possibly can. Because if you’re going to go out there and be 100% transparent about everything, you’re not going to go out there until you are comfortable with that being 100% transparent.

A couple of years ago we started learning this, and it’s just changed the way that people respond to us. It’s changed the relationships that we’ve built by just being brutally honest, brutally transparent with everything. It’s really made people build a better relationship with us. So I think that’s huge, even for PPs as well as they’re starting to build their businesses, they’re starting to expand and work with more LPs, is by figuring out “How can we be as transparent as possible with everything we’re doing?”

The other one I’d tack onto that from a marketing perspective is to figure out how you can be omnipresent. How can you be so present in the different channels, in the different watering holes that your audience is in that they can’t ignore you? If your audience is listening to podcasts, how can you be on the podcast? If your audience is reading BiggerPockets’ forums, how can you be on the BiggerPockets’ forums? Figuring out where your audience is, and then from there, making sure that you are present in those environments has served us really well at Groundbreaker.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever lightning round?

Ed Cravo: Best ever book I’ve recently read– not that many books, but I read very closely into them, maybe 10, 12 a year, and the recent one would be Drive by Dan Pink. It’s all about motivation. What motivates us? It’s so cool, because it really dispels a lot of thoughts you would assume about motivation, and they start out with an example about motivation in monkeys in the lab, and the author Dan Pink says, “This is the physics equivalent of letting the ball go and the ball flying up instead of falling down.” So they reveal this entire third driver of motivation. I don’t know if they call it specifically intrinsic motivation, but it’s all about intrinsic motivation.

It shows us that, sure, we are all motivated by rewards; that is undeniable. But there’s this entire third area of motivation, and the first one is just your basic human needs, and then there are rewards, and then there is this intrinsic motivation, which is people’s motivation to just be better. It’s people’s motivation to reach for mastery and become better at what they do, and it’s extremely powerful. Ever since reading the book, I see it everywhere. We actually included it in our hiring process from now on. We look for intrinsic motivation; it’s the number one characteristic that we look for every time we’re hiring. So I highly recommend it; very exciting, very eye-opening book.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Ed Cravo: About what I’m doing specifically, groundbreaker.co. We try to keep that very updated; that’s .co.

Joe Fairless: There’s also groundbreaker.co/joe, and you can get a free pitch deck template for all of you Best Ever listeners out there, and that will be very helpful for you as well.

Ed, thank you so much for being on the show and talking about your background, talking about portals. I know that’s just one component of your company, but the platform that you all have, and then addressing some reservations people might have about entering into this space if they’re just general partner, and as you said, eventually it’s not even going to be a choice; you just need to do it. So you might as well do it now, whenever you’re earlier on in the company, than later… Because the earlier you do it, the better off you’ll be, and I can tell you from experience, that’s definitely the case. So thanks so much for being on the show, Ed. I hope you have the best ever day. Talk to you again soon.

Ed Cravo: Thank you so much, Joe. Thank you for having me.

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Christine is a renovation loan division manager VP of mortgage lending at Guaranteed Rate INC. She has been actively involved in the mortgage industry since 1996 and her goal is to help those who may not have a large sum of money to invest in properties themselves without some additional funding. She shares her wealth of knowledge around the different types of loans available for many investors.

“I love the 203k program for people buying in areas that are up and coming because it has the lowest down payment” – Christine DePaepe

TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks today, and today we’ll be speaking with Christine DePaepe. Christine, how are you doing today?

Christine DePaepe: Great. Thanks for having me.

Theo Hicks: Absolutely, thanks for joining us. I’m looking forward to talking about mortgages today. She is the renovation loan division manager, VP of mortgage lending at Guaranteed Rate, from Chicago, Illinois. She’s been actively involved in the mortgage industry since 1996, and over the course of her 20+ year career she has originated all types of loans – conventional Fannie May HomeStyle Renovation, FHA, FHA 203(k), VA, VA Renovation, commercial, jumbo, new construction and jumbo renovation.

She has been noted by the Scotsman Guide in the top 20 FHA volume originators for four years consecutively, as well as a member of Guaranteed Rates President Club for seven years in a row. You can learn more about her at rate.com/christinedepaepe. We’ll have a link to that in the show notes.

Christine, do you mind giving us a little bit more about your background and what you’re focused on today?

Christine DePaepe: Yeah, thanks for asking. Really, today we focus on a lot of renovation, new construction, helping buyers get into properties with a little bit lower down payment for investing… And by doing that, we’re trying to help people that don’t have as much capital as some of the major investors get into properties and start their portfolio.

Theo Hicks: I’m familiar with the 203(k) renovation loans on the residential properties… What types of opportunities are there for the 5+ properties when it comes to getting a renovation loan?

Christine DePaepe: On the 5+ properties – I refer those out to my partner and we can do up to 30 units. So if you’re buying commercial property, they will be able to help renovate the individual units… So we have to look at the total of purchase price plus what they’re looking for on the renovations to come together with “Will it work?”, future value… There’s a lot that goes into it, but we can do up to 30 units.

It’s private money, so it’s gonna be a lot different than the FHA loan or the HomeStyle Renovation loan, but we will definitely have an outlet for any of the listeners who have questions on that.

Theo Hicks: Okay, so you specialize in the residential renovation loans.

Christine DePaepe: Right, I specialize in the residential. What we’re trying to do is obviously help investors who want to buy properties. We have it available for long-term holds… Or we kind of use our FHA programs. Those are owner-occupied, but the caveat is that FHA only requires you to live in them one year. So what we’re seeing is by educating the buyers they can get into a four-unit property with 3,5% down, which is very low for four units, as long as they live there for a year. After they lived there for a year, they’re not required to stay in the property. They can then rent out the unit they lived in and have a cash-flowing property.

And again, with 3,5% down, it opens up a lot to people who otherwise would not be able to do this. Because on your conventional 4-unit, you’re looking at 20% to 25% down, and most buyers don’t have that, who are trying to start their portfolio.

Theo Hicks: So if I do a FHA 203(k) loan on a property, I live in it for a year, I move out and I wanna use it as a rental property… If I wanna do another 203(k) FHA owner-occupied loan, can I just do that, without doing anything to my existing loan, or is there something I need to do first before going to do a new one?

Christine DePaepe: FHA only allows you to have one FHA loan in your lifetime, unless there’s expanding family or a job transfer. So you can’t continue to use the program like that. I have had in the past — if there’s an equity pick-up over a couple years, they can refinance into a conventional program, and then let’s say a couple years later they wanna try to do an FHA again; that is allowed. But it’s not gonna be consistently allowed, in terms of just keep churning.

More so, if you wanna do another property, you’d have to do a different program, probably conventional, but that requires a higher down payment.

Theo Hicks: Is there a rule of thumb of how many times you can rinse and repeat the FHA loan? Is it 2, is it 3?

Christine DePaepe: Well, FHA only allows one FHA loan as a client. So as a borrower, you can only have one encumbered FHA loan. So really for the investment, if you’re buying it and you’re living there for a year, you can only do that once with the FHA program… Because it’s such a low down payment, it’s 3,5% down, so they don’t allow multiple churns, meaning you can’t keep doing it every year. You can do one to start, and then if you want to do another property, with a renovation program you’d have to do a conventional, and that requires a larger down payment. So we would talk with the clients to see if it would fit their needs, if they wanted to do another one, but it would be a larger down payment.

Theo Hicks: Okay, so just to confirm – I can do one; even if I refinance my existing FHA loan into a conventional loan, I still can’t do another one. I have to go conventional.

Christine DePaepe: No, if we are able to do that, then yes, you can. As long as you are out of the FHA loan, which I have done for clients – I got them into a conventional – and then they’ve used the FHA program again. If we get you out of the FHA loan, then you can go ahead and do another one. That is correct.

Theo Hicks: Okay, so you can have one FHA loan at a time, basically.

Christine DePaepe: Correct, yes.

Theo Hicks: Okay. So if you get an FHA loan and you refinance that property or you sell that property and you get rid of that FHA, then you can technically do that.

Christine DePaepe: Then you can do another one, correct.

Theo Hicks: Okay.

Christine DePaepe: And on the FHA 203(k), they also allow for mixed-use, which is very unique, because most mixed-use is considered commercial. So when I say mixed-use, I’m not talking anything greater than four units, I’m talking four units or under. So if you have a store front that houses an insurance office, and then you have 2 or 3 residences above, as long as you’re buying the property and you live there for a year, then you can put 3,5% down on that mixed-use property, which is very low for a mixed-use property.

You need to live there a year — you can either do move-in ready. If the property doesn’t need work, that’s fine; we can still use it on my FHA program at 3,5% down. But if the residences above need updating, you can use our renovation money only on the residential units, to fix them up and gain more rental cashflow… And you need to live there a year. And again, after a year you can move out, and then you have a cash-flowing property.

So the key is just trying to help people who are willing to move into a property for a year, with a super-low down payment, start to build their portfolio of property.

Theo Hicks: Yeah, this is exactly how I got into investing. I didn’t do the 203(k) loan because I didn’t know about it at the time, so I paid for renovations out of pocket… But I did do the FHA loan 3.5% down, and got into a duplex, lived there for a year and then ended up selling the property.

So what are the major differences, besides obviously the renovation aspect of it, between the standard FHA loan and the 203(k) loan? Is it just doing renovations, I get the 203(k) loan, and if I’m not I’m doing FHA? Are there any differences in the rates, amortization, anything like that?

Christine DePaepe: So the FHA regular is for single-family, up to four units, as well as the mixed-use. They don’t do investment properties, second homes, or anything like that. It’s only primary residence. And there is a difference in the rate on the construction, which is the 203(k), because of the risk, there is gonna be about a 1% difference. So if the current FHA rate is at 3% on a move-in ready property, we’re probably at 4% on construction. And again, it’s just due to the inherent risk of construction. They have a building. But when it’s done, we can always do the Streamlined FHA Refi, and we can get a lower rate and payment if the market indicates that, at the market rate at the time the construction is done.

Theo Hicks: Okay. And another question I had is something that I’ve always been confused about, so maybe you can clear this up… PMI. If I get an FHA loan, will I have PMI forever, or will it eventually go away?

Christine DePaepe: That’s a great question. FHA changed their guideline on that. I don’t know the exact year or month, but it was in the past couple years. FHA — now PMI will never go away, unless you put 10% down. Now, remember, the minimum requirement is only 3,5%, and that’s what most people are doing. But in the cases where someone’s like “Well, I wanna put 10% down”, PMI stays on the property for 11 years, and then it’s automatically canceled. But if you do not put 10% down, it’s on forever, and that’s not a good thing. So those are definitely loans that we’re always reviewing 2-3 years out, to see if they’ve picked up enough equity to get them out of an FHA loan, to get rid of the PMI… Because it is on for the life of the loan.

That’s only new in the past couple of years. Prior to that, the PMI always fell off around year 11, automatically. So that is definitely a change in the FHA program.

Theo Hicks: So even if I put 3.5% down and then in 11 years I have 10% equity, I still have to pay the PMI.

Christine DePaepe: That’s correct. And PMI falls off with 20% equity on conventional loans, and they used to on FHA. But FHA now has it for the life of the loan.

Theo Hicks: Okay. So for a typical client who does an FHA loan, lives in it for a year, keeps it, rents it out, what’s the next loan that you recommend giving them? And then let’s do two scenarios. One where it’s gonna be a more turnkey property, and then one where it’s gonna be a property that requires renovations. And we’ll keep it 1 to 4 and mixed-use.

Christine DePaepe: Normally, if you’re gonna use FHA and you wanna do a long-term hold, I recommend doing the 3 or 4-unit. You wanna get the most property you can. After that, if we can’t refinance them out, which normally we can’t that soon – it’s not gonna have enough equity to go into a conventional loan – I would say most of my clients then had a two-unit conventional program, because on the two-unit conventional you can put down 15%… And that’s either for move-in ready, or renovation. So that would be the next step. They don’t normally go back to a three or four, because it steps up to 20%-25% down, and that can be a little bit too much… But some people are willing to do the two-unit, and that’s a 15% down.

Theo Hicks: And then for that, since it’s conventional, you said the PMI will fall off after 20%.

Christine DePaepe: Yeah, on the conventional — so if you go into that at 15% and have MI, the PMI will go away. I think it’s a minimum of five years, and then you just put in for the PMI to be eliminated.

Theo Hicks: So we order an appraisal to determine the value of the property at that point?

Christine DePaepe: No, if they’re on a very low rate and they don’t wanna refinance, they call the servicer direct and say “Hey, I’d like to have my property reevaluated”, and the company will do a reevaluation to see if they can get rid of the PMI for them.

Christine DePaepe: I evolved the 203(k) program for people buying in areas that are up and coming, because it has the lowest down payment, so it’s the least amount of cash out. I love that program for a buyer looking to move into something with a low down payment. When I meet with people, a lot of times they don’t have the capital, but they understand how important it is to invest in real estate… So we just educate them about the program and how buying in maybe an up and coming area you can gain a lot of equity.

They’re not for established high-end areas, because you’re trying to get into an area that is just up-and-coming with this low down payment… And FHA has lower loan limits, so we also have to watch that, depending on the area. Now, some areas have much higher loan limits, so we always have to go by the county. So that’s another thing I do wanna point out – the county dictates what we can do for each borrower; so when the borrowers call, because I’m licensed in 42 states, I first have to identify “Okay, what county are you looking in?” and then I help them understand the loan limits that they’re gonna be using, so they can buy their property. But if you were to say the best advice, I would say a four-unit or a three-unit and use the low down payment that’s available.

Theo Hicks: Alrighty. Are you ready for the Best Ever Lightning Round?

Christine DePaepe: Sure.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break:[00:15:40].24] to [00:16:24].27]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Christine DePaepe: Best ever book I’ve recently read… You stuffed me on that one. Let me take a pass on that one. Let’s go to the next question.

Theo Hicks: How about best ever resource you use to stay up to date on your area of expertise?

Christine DePaepe: We just do a lot of internal training at my company. We have a lot of educational within our company, so I take a ton of training. Recently, I took a lot of VA training, because we have VA renovations, so I really needed to get in tune with that whole process. So just internal training. I’m always reading what’s going on and training myself, and I train other people… So it’s more about just I’m always reading what’s going on in the industry – what changes, what things are happening… Like we just talked about FHA – for years and years and years PMI went away, and then boom, FHA makes a change… So I have to keep up on that and the guidelines.

Theo Hicks: So I typically ask “If your business were to collapse today, what would you do next?”, but I’m gonna change it up a little bit and say “If for some reason the FHA program just went away tomorrow, what would you do next?”

Christine DePaepe: I always try to stay with niche products. They have reverse mortgages out there, commercial, I love jumbo renovation… So I’m really in tune with everything different. I think there’s a lot of value when you understand just not the everyday mortgage. I do the everyday mortgage, but it’s really great to specialize in something; it just brings a lot of people to you, because of the specialty.

Theo Hicks: Okay. The next question – I’m gonna change it up a little bit, too. This may apply to you, but based on your experience, what’s the main mistake that investors make that result in their FHA or FHA 203(k) loan getting foreclosed on?

Christine DePaepe: That is a great question. What I see is when people call me they don’t even realize they shouldn’t do it. So one thing I look at is the total loan applications. Recently — I will give an example. A woman had never purchased a home, and she was (I would say) in her mid-50’s, and she was very honest; she was like “I don’t know what I’m doing, and I don’t have a lot of money.” So that right there concerned me, because she wanted to buy a four-unit major gut rehab; when I say that, we’re talking the property was maybe 150k and she was looking to do 250k worth of work… Without a lot of reserves, it’s a little nerve-wracking, because a reconstruction of that property is probably anywhere from 6 to 10 months… And we can only finance six payments. So my concern was she was gonna use every resource she had in her assets to put down on the property, and when the six months ran out, she would have to make this mortgage payment.

So after talking to her and explaining about that, she would have been a prime person that I think some loan officers maybe would not have really done the kind of diligence and education I did… And we both realized it wasn’t the right move. I’m like “This may not go well, and they will take your home. They definitely will foreclose if you can’t move forward with your payments.”

So she bought a move-in ready where there’s no timeframe to not have your rent being paid. I think that’s the one thing on these four-units that people should understand. The first six months no one’s gonna live there on most of these rehabs. Now, some are just cosmetic, and we can get them done in 3-4 months, if they’re just gonna do kitchens and bathrooms… But some, they’re doing everything – new plumbing, new electric, kind of making it an effectively new home.

The cosmetic ones are easier, but gut rehabs – we’re definitely not in the home for six months. So it’s definitely important that they have a little bit of capital. The low down payment is great, but they should have a little bit of reserves. They require that on FHA, three months reserves. Then we try to roll in payments.

So where things can go wrong is when they don’t realize — they think, unfortunately, with HDTV and all these rehab shows, “I can do a whole rehab in 30 days”, and that’s a mistake. It’s not really reality.

Theo Hicks: What is the best ever way you like to give back?

Christine DePaepe: Oh, I love to give back to the community. We do a lot with Guaranteed Rate. We have a foundation and we give back to the community. We all contribute, we all help… I do a lot of work in my community as well. That’s just something I’ve always done. I definitely have a heart for kids, and we do a lot with women shelters and helping women with children that need to start over, so we give back in those ways.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Christine DePaepe: Well, my office phone goes to my cell phone, because I don’t ever like to miss a call. I basically work and I’m available every day, especially on weekends and nights… Because you’re seeing a trend in the workplace where people are more in open [unintelligible [00:20:55].03] environments and everybody can hear each other, so people don’t really like to talk when they’re at work, so I make it a point to always be available at nights and weekends, where they’re more comfortable talking about their finances.

I’m at 773-848-4144.

Theo Hicks: Well, Best Ever listeners, definitely take advantage of that. You said you cover 42 different states, so it’s most likely that she’s in the state that you’re at… So if you’re looking to get into real estate with the FHA or the FHA 203(k) loan, definitely take advantage of that.

Alright, Christine, great content. I really enjoyed our conversation. It’s bringing me back to when I was looking at my first property, it’s very nostalgic… Just to quickly go over what we’ve talked about – there are renovation loans for 5+ units. You will refer people to someone who works with units up to 30, and it’s private money, so it’s obviously gonna be a little bit different, but your focus is on the FHA loans.

The FHA loan – it’s gonna be owner-occupied; you have to live in there for one year. The major advantages is a 3.5% down payment, and a good strategy would be to buy it, live in it for a year, move out and then rent it out. If you’re capable at some point of refinancing it or selling the deal, then you can use the FHA loan again, but you’re only allowed to have one at a time.

Christine DePaepe: Well, we also have the HomeStyle, we haven’t touched on that a little bit… I did wanna bring that up, because our HomeStyle Renovation program is for long-term hold rental properties, and it’s for single-family/townhome/condo. We don’t do multi-units. But what we’re using that for are investors who buy a house and just wanna do some cosmetic updating to increase the rents, and they don’t wanna use their own funds. So that program is 20% down.

But if you’re buying a house for example for 300k and you just wanna update it to get a higher rental rate, you can get our money, 50k to 70k, to update it. Then they’re holding them to not pay capital gains for a couple years, and either they’ll flip them or they will repay them. But those are for investors. They don’t have to live there. It’s 20% down, but we’ll give them the money to do the renovations.

So if they’re buying for 300k, doing 75k of repair, we use that as a 375k start point, they give me 20%, and I give them back 75k to do the cosmetic updates. That’s been a great program as well for some of my actual true investors who do long-term holds.

Theo Hicks: Okay, and that’s the HomeStyle Renovation Loan.

Christine DePaepe: That’s correct. It’s also available for owner-occupied multi-units, but those have larger down payments. So I just fit the needs to whatever the buyer is trying to do. Basically, it’s a phone conversation to see what they’re trying to do, how is their credit… That’s another thing I work on. A lot of people do not have any idea how to help their credit scores, or what they’re doing wrong, or what’s affecting it… And we have a software that will help the indicated scores, if there’s something wrong that I can identify; it’s very easy for us to help get everyone ready to purchase, get their credit corrected etc. So I think it’s a totality of everything. You can be very good at mortgages, but it’s the whole package – reviewing the file, finding out their goals and strategies, reviewing the credit, what can we do to make their credit score better…

You want a 760 credit score, that’s really what you want nowadays. That gets you the best rate and programs available… So that’s what everyone’s goal should be. Hopefully, everybody’s using Credit Karma, because that’s a great app to monitor your score.

Theo Hicks: Perfect. We’ll make sure they get that Credit Karma to check that out as well. So we also talked about the major difference between the FHA and the 203(k) loan, besides obviously the renovation portion of it, is the 1%(ish) difference in the interest rate.

You also talked about PMI and how that has recently changed… And now the PMI will never go away, unless you put down 10% upfront for your FHA loan. After 11 years it will be canceled. Then after FHA, some of your options would be to get a conventional loan. You mentioned the two-unit conventional program that allows you to put down 15%, and that’s a move-in ready or a renovation loan. And I believe you said the PMI expires on that after five years… Correct?

Christine DePaepe: Yeah, on the 15% down that’s correct.

Theo Hicks: Okay. Then we talked about the processes. You call whoever’s servicing your loan and then ask them to have that property reevaluated to see if you’ve reached the equity limit.

Your best ever advice was to use the 203(k) loan program in an up-and-coming area, because it is the least amount of cash out of pocket. Then you talked about how there are gonna be some loan limits based on whatever county you lived in.

Then during the Lightning Round you talked about one of the biggest mistakes you see people make with these types of programs, that result in them either getting their property taken away, or if you stopped them, they would have gotten their property taken away… And that is them just falling into the HDTV trap of thinking that everything can be done in half an hour of their time.

You’ve also talked about the reserves that are needed, and you only give out six payments, and things like that. So again, Christine, I really appreciate it. Lots of great information about these loan programs. It’s a very good episode for people who are wanting to get into real estate and don’t necessarily know how.

Thank you for joining us. Best Ever listeners, thank you as always for listening. Have a best ever day, and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Sean is the CEO of Kin, an insurance company built from scratch on modern technology. Today you will learn three factors to consider when determining the right coverage for your property; covering the property for the right amount, why it’s important to get flood insurance and he shows how you can see if your insurance company is spending its revenue on claims or other expenses to make sure they take care of their customers.

Sean Harper Background:

Co-founder and CEO of Kin, an insurance company built from scratch on modern technology

Realized the homeowners insurance industry was still being managed in a way that NO other consumer financial products are managed today

Leads a team of 100+ employees to help educate and cover their clients

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Sean Harper. How are you doing, Sean?

Sean Harper: I’m well. How are you?

Joe Fairless: I am doing well, and – a little bit about Sean. He’s the co-founder and CEO of Kin, which is an insurance company built from scratch on modern technology. He’s based in Chicago, Illinois. He leads a team of 100+ employees to help educate and cover their clients. Today we’re gonna be talking about three factors to consider when determining the right coverage for your property. This is a Skillset Sunday; I hope you’re having a best ever weekend.

First, Sean, how about you give us a little bit about your background, and then we’ll roll right into the three factors?

Sean Harper: Sure. I’ve been doing online financial services stuff for a long time; my co-founder Lucas and I both have. We really sort of stumbled into this insurance stuff when we started buying real estate ourselves. There were a lot of things about the real estate process that are pretty anachronistic, stuff that operates less efficiently than it could; insurance was one of them… And we were just scratching our heads at how manual and how much paperwork was involved, and how much back-and-forth… When there are other areas of financial services where it’s much more automated.

Think about getting a credit card, for example. You don’t need to talk to anyone; you just get the offer on the website and you click, and then you’ve got a credit card. So that’s what we’ve been building… It requires a lot of technology to do that, and most of the tech is around having — the core of every insurance company, bank, or whatever is actually a software platform. So all this software to do the underwriting rules, the accounting, the payments, the price and all that… So we had to build that, and then we had to build a really good system for understanding from public data sources and some private data sources, and even some machine learning, to understand the traits of the home. Because of course, we’re not there. We can’t see the building. So we needed a machine that’s really great at pulling data in, so that it does understand the building. It’s pretty fun, we’ve learned a lot about buildings… [laughter]

Joe Fairless: What have you learned?

Sean Harper: You know, it’s funny – the details are really important. One thing that really surprised me was even a simple trait of the building – think about square footage – is actually really hard to know. We’ll talk about a single-family house for a second. You could ask the MLS, you could ask the property tax site, and then you could actually take a picture of the home from above, from an airplane, and use the area times the number of stories you know it is to calculate it… And you’ll end up with three different answers.

Joe Fairless: Yeah.

Sean Harper: You could ask the person who lives there, and you could ask the person who lived there before them, and they’ll give you two different answers. And that’s just for square footage, which really should be a simple thing. Then you start trying to ask people what the quality of their cabinets and appliances are, or how old their HVAC system is, or what the pitch of the roof is… And the details get really complicated. There’s a lot of ambiguity.

Joe Fairless: How do you navigate that?

Sean Harper: We know that no data source is gonna be perfect for this stuff, so we try to have redundancy and we try to have objectivity. One thing that insurance companies have always done is they’ve always relied on the user and/or broker to tell them about the building. And sometimes they know, and sometimes they’re honest. But there are also times when they know and there are times when they are dishonest. The first part, the objective sources that we use – they’re not always perfect, just like asking the user isn’t perfect… But at least they’re objective. They’re not skewed in any way. Versus if you start asking somebody who knows, that if they tell you they have a newer roof, for example, that they’re gonna end up with cheaper insurance – well, that creates a really big incentive for them to tell you they’ve got a newer roof. And people do what benefits them; maybe they’re not being dishonest, maybe they’re omitting something.

So that’s a big part of it – we try to rely on sources that are objective… And then the other is we try to have redundant sources. In that example I gave you before, of square footage, if those three data sources are all pretty close, then you have a high confidence that it’s accurate. If there’s a huge spread between them, or maybe two of them more or less agree but the third one doesn’t, that tells you something about it as well. So having multiple data sources that are calculated in different ways, that can be used to cross-check against each other, is pretty important, too.

Joe Fairless: That’s a good lesson for anything where you have conflicting information… Even if it’s a he said/she said thing, well what are the objective sources saying that took place? And then are any of those objective sources redundant, or aligning with each other? And if so, then you go that direction with the answer.

Sean Harper: Yeah, absolutely. Having some tie-breaker is really nice.

Joe Fairless: Yup. Let’s talk about the three factors to consider when determining the right coverage for your property. What’s number one?

Sean Harper: Number one is you really wanna make sure that you’re covering the property for the right amount… And it’s really easy to get drawn into trying to find the cheapest insurance, because no one wants to pay more for insurance… But a lot of companies, especially a lot of insurance agents, will try to fudge essentially the insured value. So you might have a home or a building that’s legitimately worth 1.5 million dollars, and you’ll get an insurance quote that looks really good… And if you look under the hood, you’ll see that they’re only ensuring the building for 1.2 million dollars.

So that’s really important, is just to figure out how much the coverage costs you relative to the amount that’s being insured, and to make sure that the amount that’s being insured actually does cover the property… Because it’s not likely that something happens to your property, but if it does, you definitely don’t wanna be short on your insurance, because that could create a big problem; it could wipe out your equity.

The second one is — a lot of people don’t realize this, but most property insurance, commercial or residential, doesn’t include some really important hazards… And the biggie is flood. A normal homeowner’s insurance policy, or a normal commercial – it can go either way; it could include it or it couldn’t. You really wanna make sure that you’re buying flood insurance… And that’s true even if you’re not in a flood zone.

Mortgage banks will usually enforce that you get flood insurance if you are in a FEMA-designated flood zone… But the problem is that FEMA drew those flood zones a long time ago, and things have changes. The types of weather that we get change, the sea levels have risen, and then also things get more built up, it can create flood dynamics… If everything’s paved over near you, there’s no ground for the water to soak into, so it makes floods more likely. And you can see some really bad situations. If you go to Houston, there are neighborhoods that still haven’t really rebuilt fully after Hurricane Harvey, which was two years ago, and that’s because people didn’t have flood insurance. So 50% of flood losses happen outside of FEMA-designated flood zones. And the really tragic thing is that if you’re in one of those areas, buying flood insurance actually doesn’t cost that much.

Joe Fairless: If you’re in a non-FEMA flood zone.

Sean Harper: If you’re in a non-FEMA flood zone. Because it’s not that likely that you’re gonna get flooded, but that’s why you buy insurance. You buy it for the stuff that’s not likely, but would be really crappy if it did happen.

Joe Fairless: What are some other things besides flood insurance that most property insurance doesn’t include?

Sean Harper: The other biggie is earthquake. If you are in an area where earthquakes happen, that’s usually not covered by a normal policy… And then there’s sort of a subset of this where the deductible will be different. Oftentimes now if you’re in a place where there is a lot of wind and hale, you’ll end up with an insurance policy that has a second deductible. So it might be a thousand-dollar deductible. But then there’s an asterisk next to it that says “Well, unless it’s wind, or hale loss… Which, that’s a pretty common type of loss.

Joe Fairless: Sure.

Sean Harper: It’s a very common insurance claim. And those deductibles could often be a lot higher. It’s very common. They have a $1,000 normal deductible, and a $10,000 hale deductible on even just a normal house.

Joe Fairless: Okay. And number three?

Sean Harper: Number three – this one gets a bit esoteric, but it really helps if you can look at the financial statements (which are all public) from your insurance company. They actually have to file their financials with their state regulator…

Joe Fairless: I can already tell this is gonna be less than half of a percent of any person who’s getting insurance, based on that, so far.

Sean Harper: Absolutely. But it’s so easy to do. What you’re looking for is you’re looking for how much of their revenue they spend paying claims, versus how much of the revenue they spend on their overhead. What you wanna see is you wanna see an insurance company is spending most of the revenue that they get paying claims… Because that’s what you as a user care about. And because insurance can be really hard to compare, the last thing you want is your insurance company spending a little bit on paying claims… Maybe they argue with you a lot when there is a claim, or try to short-change you, and then they’re spending the rest of the money on corporate jets and fancy buildings and everything else for them.

Joe Fairless: Well, not having studied financials of insurance companies before, what percent would be considered high, versus average, versus low?

Sean Harper: That’s a really good question. For property insurance, the average is about 30% is spent on overhead and 70% is spent on claims. There’s actually a lot of variance. You’ll find companies that are 40/60, you’ll find companies that are 20/80. And usually, the ones that have the lower expenses are also the ones that have better customer satisfaction, because they’re not nickel and diming you when you have a claim.

Joe Fairless: What are some insurance companies that stand out in a good way in that regard?

Sean Harper: Some of the best insurance companies are regional. We’re very regional; we’re focused in just a handful of big states. One that is a national carrier, more on the personal insurance side, that does really well on that, is USAA. But it really is hit or miss. It’s not always the big brands that are the most efficient. In fact, some of those are the least efficient.

Joe Fairless: And what are on the opposite side? USAA is on the good side; what about the opposite side?

Joe Fairless: Where should they go to research that? Where is an easy place to look at that?

Sean Harper: The easiest is to just go to whatever state you’re in, search for their office of insurance regulation. Where I live, I just google “Illinois office of insurance regulation.”

Joe Fairless: Anything that we haven’t talked about as it relates to the three factors to consider when determining the right coverage, that you think we should?

Sean Harper: Those are my top three.

Joe Fairless: Well, how can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Sean Harper: Kin.com is the easiest way.

Joe Fairless: Sean, thank you so much for being on the show and talking to us about the three factors – one, make sure we have the right amount; two, make sure that we have the right hazards covered, taking a look at flood and earthquakes in particular, and three, taking a look at the public financial statements of the insurance companies, and seeing what proportion of revenue is paying claims versus overhead.

Thanks for being on the show. I hope you have a best ever weekend, and we’ll talk to you again soon.

Sean Harper: Thank you.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Eachan founder and CEO of Nestegg, a platform for property management and maintenance that makes being a landlord refreshingly easy. Eachan is a returning guest from episode JF1980, where he shares the ways technology can make your property management easier. In this episode, he is going to share how you should best go about scaling your business to be nationwide.

Eachan Fletcher Real Estate Background:

Founder and CEO of Nestegg, a platform for property management and maintenance that makes being a landlord refreshingly easy

Worked as the CTO and VP of product at Expedia where he built and led multiple teams, developed award-winning products

Has been interviewed previously on the show, that episode will release on February 3rd, 2020

In this episode, Theo Hicks interviews Eachan Fletcher, founder and CEO of the property management and maintenance platform Nestegg. Eachan discusses all of the insights they discovered while developing Nestegg. Learn about Nestegg’s core features for property management and how they designed their solutions to fit the needs of their targeted consumer.

Eachan Fletcher Real Estate Background:

Founder and CEO of Nestegg

Worked as the CTO and VP of product at Expedia where he built and led multiple teams, developed award-winning products

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, I’ll be hosting today’s episode. Today we are speaking with Eachan Fletcher. Eachan, how are you doing today?

Eachan Fletcher: I’m super-good. Thank you so much for having me.

Theo Hicks: Absolutely, and thank you for joining us. I’m looking forward to our conversation. Before we get started a little bit about Eachan – he is the founder and CEO of Nestegg, which is a platform for property management and maintenance that makes being a landlord refreshingly easy; we’ll definitely dig into that. He also has worked as the CTO and VP of product at Expedia, where he built and led multiple teams, developed award-winning products. I actually used Expedia to book my recent trip to Cincinnati for work.

Eachan Fletcher: Oh, great.

Theo Hicks: He is based in Chicago, Illinois. You can say hi to him at Nestegg.rent. Eachan, before we get started, can you tell us a little bit more about your background and what you’re focused on now?

Eachan Fletcher: Sure. I’ve always been a tech guy, worked in technology all of my professional career, and I’ve always been fascinated by how technology and how data can help people with ordinary everyday frustrations that they’re often not even aware of… And I think my time at Expedia was one of the most transformative times of my career, where we spent a lot of time looking at travel, something that happens out in the real world, and we could better support that through technology and data.

I think we’ve fundamentally changed how people travel, and I think if you look at what we used to do – I think this probably dates me, I guess, to all of your audience… But I think everyone remembers the days of the travel agent, where you would have someone in a store, with a big, glossy catalog, and you would go there and say “I wanna go on vacation”, and they’d flip through some pages and they’d try to figure out where you should go, and they’d talk to you about prices, and packages, and [unintelligible [00:03:28].08] arrangements… And then you’d get some paper tickets. That was the big deal. And in that scenario, you had a lot of power and a lot of access [unintelligible [00:03:36].22] locked up into the hands of a small number of experts. If you look at what we’ve achieved in travel, we’ve democratized that by taking that access and that power and that information and disseminating it directly to the people who need it and who are benefitting from it.

Now, we don’t even think twice. There are people who’ve never used a travel agent, and people are going on more trips and more vacations than ever, than in any other time in history now, because it’s so easy, and it’s so accessible, and the information is available. We take it for granted, but that’s a major transformation, and it was amazing being part of that journey, and just seeing how technology just totally disrupted, but then lifted up an entire industry.

Then as a small real estate investor myself, I got more and more interested in buy and hold real estate investing and building up a small portfolio of my own, and then I started to hit some of those exact same frustrations – where is the expertise, where is the information, what are the great automated technology tools that help me build and maintain a profitable portfolio, and take care of my future income? I saw the same pattern emerge in real estate, that we addressed in travel… So that’s what drew me into this, and that’s why I founded Nestegg.

Theo Hicks: When did you found Nestegg?

Eachan Fletcher: We started in 2017, with a beta, in the Bay Area. In 2018 we got our proper round of VC funding, and any startup people listening will appreciate what’s involved in that. In January this year we launched in Chicago.

Theo Hicks: So it sounds like you applied the same concept — you’ve kind of already said this, but you’ve applied the same concept that you did at Expedia, finding what frustrates people and then creating some sort of automated tool that alleviates that frustration. Do you want to maybe walk us through how you specifically identified this particular frustration with property management and maintenance, and then how that went from just an idea to you actually start a business and creating a product that (as I mentioned) alleviates that frustration?

Eachan Fletcher: Yeah, for sure. Let me do my bit to summarize a good year plus of work, in a quick and punchy answer for you. I think everything starts with understanding the space and the customer. We used very practiced, standard market research, user research methodologies that we’d been using for years in the Bay Area and Silicon Valley to draw out insights about what’s missing and what’s difficult about property management today.

So step one was gaining those insights. Through various techniques, we found out that really the hard part and what was really missing was for people who were reasonably new to property management and who had reasonably small portfolios. I’m talking people 2-3 years into being a landlord, with less than 10 properties. That’s the ideal customer that we’ve specifically tailored our product around.

As a general rule, I think when you build technology products, particularly as a startup, you have to be hyper-focused. It’s so easy and so tempting to make your products for everyone – any kind of landlord, any kind of property, any size portfolio… But I think if you do that, you end up making a lot of very generalized features, that become very ordinary and common, and don’t necessarily exactly match someone’s specific frustrations.

So to talk through what we did to make that real, as an example – when we identified this sub-segment of landlords, these reasonably new people with small and medium portfolios, we’ve found a handful of main pain points that they had.

The first one is one of cashflow – these are people who are just starting out in their real estate investing journey, so often they’ve really leveraged themselves a lot to get their first few properties… So cashflow is tight month-to-month; exactly when expenses hit, exactly when [unintelligible [00:07:43].22] things like that matter. So that was insight number one.

Insight number two was they don’t have an existing network of trusted contractors that they know to deal with all the maintenance, that they know will do a good job, will charge them a good price [unintelligible [00:08:01].09]

And the third one just comes down to confidence. Without access to the expertise of someone like a property manager, there’s so many things they don’t know they don’t know, if that makes sense. We’ve designed that product exactly around those three features. And when we did some initial research – because obviously, step two is always go out there and find today’s solutions and try to figure out why people aren’t happy with today’s solutions; why these pain points are still pain points, and if other prop tech companies exist, if other real estate companies exist… And what we’ve found was all the guys out there already doing things for small, independent landlords – they were really focused on the online things that are the beginning or the end of every lease.

So finding a tenant, listing the property, background checking potential tenants, signing a lease… Those kinds of things are – I hesitate to use the word “easy”, but they are now becoming what I would consider a commodity. You have so many options doing things like that. But once you have someone in your property, and then they’ve got a [unintelligible [00:09:07].04] you are on your own. That is your problem, and you have to find a contractor you can trust; you have to figure out when the tenant’s available, when the contractor’s available, take care of the scheduling, make sure it gets done, make sure the contractor gets paid, make sure the work is reasonable… There’s a lot to it, and we didn’t find anyone really taking that pain away, so that’s what we did.

So the features that we’ve rolled out so far maybe to touch on that as the core of the platform is about that maintenance. Once you have a tenant in, they’re there for 18 months, two years, 2,5 years, and during that time you’re gonna have 4-6 small to medium maintenance jobs go wrong. That’s what’s gonna happen, and you need to be able to resolve those quickly.

So our product – we like to think of it as kind of like the help desk for landlords. A tenant will report a maintenance issue to us, anytime 24/7, we diagnose that issue, figure out exactly what’s wrong, we figure out a price for it, and then we notify the owners. So as a landlord on that platform, you’ll get a notification in our app to let you know there’s a maintenance issue, we’ll let you know what [unintelligible [00:10:15].19] you’ll see a before image, you’ll see our diagnosis of the issue, our recommendation, and a price to get it fixed. If you want us to go ahead with that, all you need to do is tap the button and then we take care of everything.

We find the right contractor – we have a big network of contractors that we’ve onboarded, that we’ve verified, background-checked; we track the quality of their work, we stand behind every job they do, and we take care of the scheduling, the timing of the contractor with the tenant, with making sure the job gets done. We take care of paying the contractor, and then maybe charge your credit card once you’re happy. That way everything is taken care of with a tap; all those dozens of phone calls – down to a tap. We stand behind all the work we do for 14 days, we actively monitor repairs to make sure they stay fixed.

That’s the core of the platform, and that takes away that major pain point of “What do I do if something goes wrong?” Because today if something goes wrong and you’re a small rental owner, your whole life is thrown into disruption while you desperately search around for someone who [unintelligible [00:11:16].11] deal with it. So we take care of that.

Then the other major features are around this cashflow issue, which again, is unique to newer landlords or smaller portfolios. We have several features for that. One is we’re doing some very differentiated things with rent collection. We are the only platform who will pay you your rent in advance. So if you use rent collection through us, we will guarantee you available funds in your account, right upfront on the first, even if we don’t collect from your tenant until the 10th, or the 15th, or the 5th, or whatever. And that just takes a lot of monthly crunch that happens every month [unintelligible [00:11:58].00]

The other thing that we’re rolling out right now is a feature we call “Fix now, pay later.” As I’m sure you’re aware, a lot of traditional property managers will execute on small repair jobs and then take their money for the invoice out of a future rent check. So we’ve taken that one step further, where we’ve allowed you to spread that over a number of rent checks.

So instead of having all $300 or $400 come out of the very next rent check, and then have a potentially tight month, you can choose to spread that over 2, 4 or 6 different rent checks, and then just have a small, manageable amount come out each time… Almost financing your maintenance over time for rent collection. We think that little things like that – it’s easy to do with smart technology, and it just takes a major burden off of rental owners, and that’s what we’re all about.

Theo Hicks: It’s funny, because those three particular pain points you’ve just addressed are addressed by those three features you mentioned: the maintenance, paying the rent in advance, and spreading the maintenance costs out over time – those are the three main issues I had with the property management company I worked with. Every time I was like “Oh, cashflow issue.” “Oh, fix now, pay later? That’s great.” I definitely wish I would have found a service list this when I was first starting out, because those are definitely three major pain points that I had.

So right now you said you launched it in the Bay Area, and now it’s in Chicago. So if I’m an investor in Tampa, Florida, for example, I can’t use Nestegg.

Eachan Fletcher: You can use us; we have a whole bunch of property management features that give you regular reminders about key dates and tasks, information about your units, a chat feature to allow you to keep in touch with tenants, and give them notices and things without needing to exchange personal details… So you can use all our property management features, you can use all our rent collection features, but our maintenance is — right now we have pretty much all of Illinois, pretty much all of Indiana, Wisconsin area, L.A. and San Francisco. And that’s because we wanna take our time to make sure in every city that we switch the maintenance feature on, we wanna take our time to make sure that we’ve got only the best contractors in that area locked down, and we’ve taken the time to make sure to verify them, make sure that they’re trustworthy and they do great work, because eventually we put ourselves on the line, and our reputation on the line through their work.

And of course, we negotiate volume discounts with these guys, and that could take some time, too. So we try to pass on some savings to our owners as well.

Eachan Fletcher: How about this one – if I could go back and tell myself something to do differently ten years ago, I would have said be more aggressive, and I would have taken on more properties sooner, and I would have grown my portfolio more quickly. But I think starting out can be expensive and it can be scary; particularly when you’re starting out from a reasonably comfortable financial position, you’re gonna buy a couple of properties that you’re never gonna live in, you’re gonna carry a lot of financial risks and a lot of overheads for a while, and you may even have to make compromises on your current lifestyle, but boy, it’s worth it in the future… And I think especially if your long-term plans are based on 401Ks and things like that, I’d say you should grow a portfolio at any opportunity you can. Don’t wait for the perfect deal and the perfect time. You’ve just gotta make your start. The sooner you make your start, the more comfortable you’re gonna be later in life. That would be what I’d say. You don’t have to go to 27 real estate events and read ten books, you’ve just gotta get a unit and try it.

Theo Hicks: Exactly. Alright, Eachan, are you ready for the Best Ever Lightning Round?

Eachan Fletcher: Yeah, for sure. Let’s do it.

Theo Hicks: Okay. First, a quick word from our sponsor.

Break:[00:16:04].16] to [00:17:01].29]

Theo Hicks: Alright, what is the best ever book you’ve recently read?

Eachan Fletcher: Best ever book I’ve recently read… I love anything by Steven Pinker. I think he’s an extraordinary genius, and sees the world a very different way. I think it really helps you understand the Universe you live in through the eyes of people like that.

Theo Hicks: Blank Slate?

Eachan Fletcher: Oh, Blank Slate. Yes, there you go. You’re familiar.

Theo Hicks: Yeah, I’m very familiar with Steven Pinker. If your business were to collapse today, what would you do next?

Eachan Fletcher: You know what – I would do the same thing again.

Theo Hicks: There you go. Simple.

Eachan Fletcher: I think this is a huge opportunity that touches everyone, where you live, and how you enjoy a home.

Theo Hicks: What deal did you lose the most money on, and how much did you lose?

Eachan Fletcher: That’s a great point. My answer is probably not the one you’re looking for… I’ve always done pretty well on the real estate side, but I’ve lost a lot of money investing in a handful of startups, and I think that is one of the things that goes along with startups – in the first six months or so there’s a very high chance of failure, and there’s a very small chance you’ll change the world. And I think it’s worth taking those chances, because eventually you change the world.

Theo Hicks: And then lastly, what’s the best ever place to reach you?

Eachan Fletcher: Oh, I’d love to hear from anyone who likes what we’re doing and wants to know how we can help them. Just go to Nestegg.rent.

Theo Hicks: Alright, Eachan, I really appreciate you coming on the show and sharing your journey with us, and as well as your new business, Nestegg. Just to summarize a few takeaways from me – I really liked how you broke down the steps to starting a business, and again, this is in the perspective of founding a property management automated technology business, but this could be applied to real estate as well. Number one is gaining insights and understanding the space and the customer.

Then you also mentioned that when you are building a new technology product, you wanna make sure you’re being very hyper-focused, as opposed to making general solutions that don’t necessarily address a specific problem, or can’t address a specific problem that a specific person has. And then the insights that you gained were a cashflow issue, the network of existing contractors, and then the confidence that’s lacking in not necessarily knowing what you don’t actually know.

Then step two was finding the competitors and figuring out why people aren’t happy with the solutions. Based off of that, you came up with Nestegg. The three main features were the maintenance, so it’s basically a help desk for landlords, and you went through the process of how you’re able to basically handle the entire maintenance process for the landlord.

Two is the cashflow issue. Rather than getting rent a month later or two months later, you’re able to pay rent in advance. So they’re paid on the 1st, even if you guys haven’t collected that rent yet.

And then there was your “Fix now, pay later” new feature, which allows landlords to spread the costs of the maintenance over a number of checks, as opposed to it coming out of next month’s rent.

And then lastly, your Best Ever advice, which is advice you would give to yourself ten years ago, which is to be more aggressive, take on more properties sooner to make sure you’re growing your portfolio much quicker.

Again, I really appreciate it, Eachan. I really enjoyed this conversation. Best Ever listeners, thanks for listening. Have a best ever day, and we’ll talk to you tomorrow.

Josh and his wife used the house hacking method to purchase their first investment property. They were able to leverage that strategy to grow to over 5 units. We’ll hear some challenges they faced along the way, and more importantly, how they overcame the challenges. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“You start to realize that with small sacrifices, you can build generational wealth” – Josh Mitchell

Josh Mitchell Real Estate Background:

Real estate investor with his wife

They own 5 units with another unit under contract, used house hacking and cash out refinance to get started

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Josh Mitchell. How are you doing, Josh?

Josh Mitchell: I’m good, Joe. How are you today?

Joe Fairless: I am doing well, and I’m glad to hear that. A little bit about Josh – he is a real estate investor and invests alongside his wife. They own five units, with another unit under contract. They used house-hacking and cash-out refinances to get started. Based in Chicago, Illinois. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Josh Mitchell: Yeah, absolutely. As you mentioned, my wife Sarah and I have used many different techniques and styles to get us started. We bought a condo out of school, and moved into that, and with the focus of eventually renting that condo out, as we kind of got into that condo, we got married and used our wedding funds to actually purchase our first investment condo in the same building that we had our first condo in. The association then kind of switched the rules on us and allowed for rentals all throughout that complex, so that’s when we moved into the next phase and started our investing journey there.

Joe Fairless: Was that a decision that you both wanted to do, where you invest the wedding funds into your first investment property?

Josh Mitchell: It took a little convincing on my end from just a numbers’ perspective and getting my wife on board. She’s always the more analytical one of the both of us, so she definitely needed to see the numbers… And it was a blessing in disguise, because it really made me jump in and dive deep into every little thing and explain to her what I envisioned and what these funds could do for us moving forward.

Joe Fairless: So for someone who has a significant other and is in a similar position where they have funds that they’ve either received or just saved, what would you say would be some specific things that you did that would be helpful for them?

Josh Mitchell: My wife and I both are along the same mindset of joining finances; it really helped us stay on track and really focus and dive deep into our finances and see where we were spending money, where we could maybe cut back… And then falling into the money that we got from the wedding, which really obviously was a blessing from our family and friends, that they were generous enough to do that… Really just kind of focusing on where that lump sum of money could be best used. We didn’t want to use it on cars or things that would depreciate. We both were in the same mindset of putting this money to use and really using it to the best of our ability to create generational wealth and get us started on that journey towards financial freedom. Our goal has always been to retire by the age of 40, so that’s kind of what pushed us to jump in and get started.

Joe Fairless: What are the numbers on that first investment property?

Josh Mitchell: The numbers on that one – we bought that one for 85k and rented it for $1,400, again, in a suburb of Chicago here. That is pretty much the going rate on a 2-bed/2-bath condo in this area… But we got in on that one in 2013-2014 range, and since it’s probably doubled in appreciation, so it was a good time to get into that complex.

Joe Fairless: Yeah, that sounds amazing. Now that it’s doubled in value, have you done anything to capture some of that?

Josh Mitchell: Yeah, we actually financed both of those condos that we had. We’ve moved out of the one we were living in and sacrificed for a year; we moved into a 500 sqft. one-bedroom/one-bath apartment, with the dog… So newlyweds in that small of a space, you can imagine how that year went… But we did a cash-out refinance on both of those and we were able to purchase our first single-family home in the same city, and go to the next step with some of those funds that were available in those condos.

Joe Fairless: When you take a look at the purchasing condos versus single-family homes, what are some of the pros and cons that you see?

Josh Mitchell: The biggest con was any townhouse condo is gonna be the association deuce. They can really eat into that monthly profit that you might see on a single-family home… But I always kind of hesitated that as well, because you do have that management company in place, you have people that are at a drop of the fat gonna be there to fix certain things and be able to repair things that the HOA covers. You’re not gonna have the roof expenditures, for instance, that you would have at a single-family house.

So the accounting on the single-family side might a little bit more involved from your individual perspective, but the condos – some people shy away from them just because of those HOA dues, and kind of having someone else maybe control or change those rules at any given time.

Joe Fairless: So what gives you comfort, given those potential disadvantages for condos?

Josh Mitchell: We’ve really kind of gotten to know a lot of the board members on the condo association, being that they’ve just changed the rules to allow rentals. It was in 2014… They’re very new to doing that, so I think that that kind of gave us a little bit more comfort that they were gonna at least give this a go for the foreseeable future. They capped the complex at 15% rentals, so we actually got in at a great time, with allowing those rentals up to two units that we had. But most of those are owner-occupied, and we’ve actually built good rapport with some of the neighbors as well, to allow them to have a little bit of say; or not say, but a little feedback on “The renters are good” and maybe keeping an extra eye on them, and just kind of helping us, be our eyes when we’re not there all the time.

Joe Fairless: On the first two properties – and I know you’ve got more than that, so we’ll get into that… But on the first two, what was a challenge that you came across, and how did you overcome it?

Josh Mitchell: Well, the first investment condo we bought there, the tenant was moving their stuff in and we had a sewer back up on day one after closing.

Joe Fairless: Oh, goodness gracious…

Josh Mitchell: So that was… [laughs] Yeah, that was lovely; I had to go through insurance, getting a claim filed, they tore out all the carpets, cut the drywall two feet up from the floor, replaced all of that… So we were in a little bit of a difficult position from day one on that one. But we got it all resolved, and got the tenant comfortably living in there now. She’s been in there since we’ve had it, so we’ve had no turnover in that unit, which helps a lot with [unintelligible [00:07:47].25] some of those costs and not having any vacancies as well to go along with that.

Joe Fairless: When you say “sewer back up”, it’s one thing to say that, but can you describe exactly what happened?

Josh Mitchell: Yeah. A sewer back up — and again, I don’t exactly know what drain it came back-filled into, but… It was either the shower, or the toilet… The sewer line was backed up, and a lot of nasty stuff was in that unit that had to be mediated and taken out by SERVPRO, who came in and did all that work for us. It was just kind of a nasty week or two to get all that resolved. And it doesn’t smell very good, it’s not very fun to be in and to be a part of, that’s for sure.

Joe Fairless: So this is your very first investment property that you and your wife put your wedding funds into… And you finally get a tenant, and day one of them moving in, there’s sewage running through the unit. What did your wife say about that?

Josh Mitchell: “Are we idiots for doing this?” [laughter] That’s pretty much what she said. I had to do a lot of more convincing and tell her “Insurance is gonna cover it. We’ll be fine.” Just kind of give her that comfort. But it was definitely something that we had a little apprehension and hesitation on going forward… But we’ve seen the benefits of it, getting it fixed and making sure that we stay with the course there.

Joe Fairless: And what was it like for you navigating the conversation with the resident as they were moving in day one and this is happening?

Josh Mitchell: Yeah, we really just tried to go above and beyond to them, to give them everything they needed. Luckily, their lease on the apartment that they were at and currently living at wasn’t up yet, so they had a place to go, just for those couple days while we were getting things fixed… But we tried to go above and beyond and help them. We offered to help move anything that they needed for the time being back into the apartment for them. We tried to make sure that they were comfortable, and if they needed anything, it was pretty much all hands on deck; anything we could do to keep them happy and just assure them everything was gonna get fixed correctly, and make it a happy place for them to live.

Joe Fairless: Those were the first two units… Now let’s talk about the next one.

Josh Mitchell: So then we jumped into our first single-family, and – wouldn’t you know it – week one we had a little water back up in that one as well. So we had no sump pump at that single-family, which – that’s one of those learning things that we look for now at our places that we purchase… But this one did not have a sump pump, and of course we got torrential downpour and had a little water back up into that specific residence… But again, had to get it removed, and dried out… We actually did install a sump pump at that residence to never have that problem (hopefully, knock on wood) ever happen again to us… But again, had to go through pretty much the same thing on that one as well, which is coincidental, I’d have to guess, if you wanna call it…

Josh Mitchell: Yeah, yeah… Those are our two horror stories. But we pushed through, and like I said, stayed on the course and kept going here.

Joe Fairless: And what are the numbers on that third property?

Josh Mitchell: We bought that one for 230k, and it rents for $2,100-$2,500 right now a month… So cash-flowing roughly just over $500/month after expenses and everything are paid. So that one has been a very good one for us, and has appreciated as well to roughly about 315k-320k in value.

Joe Fairless: What about the next deal?

Josh Mitchell: The next one we jumped into we went back to the same condo building, if you believe it or not… [laughs] We bought another condo in that same building, this time on the second floor. We were trying to forward-think and think about any water down-flowing to the first floor; the first unit had some sewer back-up problem… But we went back to that condo and got one on the second floor this time, and it’s been just as good, if not better than the other ones, with no problems, to this day at least.

Joe Fairless: And you have five, right? So we’ve got one more?

Josh Mitchell: Yeah, we’ve got one more. It’s a townhouse a little bit further away; it’s still in the same town, on the South side of the town, I have that one as well. Just bought that one for — 150k I think is what we paid on that one, and got that rented at that 1% rule, with $1,550.

Joe Fairless: How are you finding these properties? I’ll be specific – how did you find the fifth one?

Josh Mitchell: Actually, all of these properties have come off the MLS. We actually have a great realtor that we work with. She’s done all of our purchases here for us, but she’s awesome at sending us usually leads that are about to come on the MLS, to kind of give us that first glance, which has actually helped us build rapport with other realtors in the area as well. They send our realtor some leads and ask if we wanna go look at the properties before they even put it on the listings… And it’s been awesome to have that, and maybe have a first crack at making that offer to a seller. The seller always feels good when they can get their properties sold before it even is listed for anybody to come look at… So it gives us a little bit of negotiating power and helps us get that started and get the ball rolling on making an offer.

Joe Fairless: With any of the deals – pick any of the five – was there any major negotiating between purchase price or terms?

Josh Mitchell: I’m trying to think if there was any real negotiation… We did have on the first single-family we bought – it was listed a little bit higher than what we were able to purchase it for. The only thing that gave us that leverage was, again, getting in before it went on the market… But this property in itself had a converted garage, they had an in-law suite that they weren’t going to convert back for us… So we kind of gave them a little bit lower offer, and just kind of justified it in the sense that it was the only house on the block, and within a five-mile radius — actually, our appraiser had a little bit difficult time finding comps, just because it didn’t have the garage, like the rest of the houses did. So again, we kind of took that into account and gave them a little bit lower offer than maybe what they had it listed for.

Joe Fairless: And do you remember the numbers?

Josh Mitchell: I think they had it listed for 249,9k. And again, I know that it’s a big difference there, but it did need a little bit of updating; nothing huge, all cosmetic stuff… But we got it, like I said, for 230k. I feel like that was a good negotiation and we got it at a good price for what they had it listed at.

Joe Fairless: Did you have anything under contract that didn’t happen?

Josh Mitchell: We have not, actually. We’ve been lucky that everything we’ve offered on has happened. I have actually just started sending letters to multifamily owners, and just kind of researching them through the tax portals and through a title rep… I’ve just started sending letters, and actually just got my first rejection letter; I’m kind of proud of that, actually…

Joe Fairless: Oh, congratulations. [laughter]

Josh Mitchell: Yeah, I know that that’s kind of the next step, right?

Joe Fairless: What did they say?

Josh Mitchell: “Hey, we got your letter. We’re not interested in selling. Please don’t contact us ever again.” So a little slap in the face, but nothing we can’t bounce back from. I plan on maybe trying again in a year or two and seeing where they’re at, and trying to overcome any objections… Maybe their circumstances change.

Joe Fairless: What’s been something that you thought would be easier than what it actually is?

Josh Mitchell: I think that I thought it would probably be easier to find good, reliable tenants. Luckily, we’re in an area that tenants are usually very good. It’s very competitive in our area though; there are a couple complexes that allow people to get in for maybe a little bit cheaper prices than what we have… But we feel like our unit — we shoot for the B+ to A property, so we’re willing to pay a little bit more premium for those properties, and it kind of comes with the territory of trying to find better tenants as well, though. So it kind of works hand-in-hand, and we wanna make sure that we get the best people in our properties. We’re always willing to maybe wait another month or two to find that right person. I guess that’s been one of the bigger challenges that we’ve faced.

Joe Fairless: What’s been something that’s easier, that you thought it would be a little bit harder?

Josh Mitchell: I think that the managing of it — I do all the managing myself of the properties, so I’ve found that that’s been very smooth. Obviously, there’s things that come up, there’s things that happen – for instance, all the things we’ve discussed previously… But other than that, the renters pay on time. As long as you keep your properties and things organized, well-documented with everything, that process has been very smooth, and we’re more than happy that we’ve kind of chosen this road to go down.

Josh Mitchell: My advice would be just to make that first sacrifice to get the first property. We sacrificed living in a nice condo down to a 500 sqft. apartment, we sacrificed our wedding funds to get started… I think once you start and get that first property, as you probably know, Joe, you get the bug; you get the real estate bug and you start looking for the next property, and the next property, and you start to see the benefits from a cashflow standpoint versus tax advantages, and you really start to realize that with the small sacrifice that you can make, you can really envision your future and see the generational wealth that real estate can bring, and help provide for you and your family.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Josh Mitchell: I’ve gotta go with the cop-out answer. Rich Dad, Poor Dad has been the life-changer for me. That’s what got me started and going here.

Joe Fairless: Best ever deal you’ve done so far?

Josh Mitchell: I’d have to say that it’s gonna be our single-family. Regardless of the water back-up and stuff…

Joe Fairless: Was it really a water back-up?

Josh Mitchell: It was really a water back-up, yeah…

Joe Fairless: Oh, that was water — yeah, I’m getting them mixed up with the condo.

Josh Mitchell: Yeah, so that single-family one – $500/month in our pocket, and we’ve had no issues, and it’s been a great property for us to this point.

Joe Fairless: What’s a mistake you’ve made on a transaction we haven’t talked about already?

Josh Mitchell: Well, the only mistake I feel we’ve made on the transaction side of things is my wife travels for work a lot throughout the year, and we’ve had to do a couple of power of attorneys, and didn’t get that signed one day before closing… So we had to scramble, because the title company needed the original, and they needed a bunch of different things, so we actually had to push back closing a day or two on one of the properties… But that was pretty much the only hang-up that we’ve had to this point.

Joe Fairless: Best ever way you like to give back to the community?

Josh Mitchell: I’m a huge athletics freak. I played in college, in the suburbs here in Chicago, but I’ve coached at the college level, and I’m actually coaching at the high school football level this coming season… So I’m all about working with that age group. Any friends and family that wanna talk real estate – I’m always pushing them to try to get involved and try to get their feet wet, and I love just discussing the advantages of doing that.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Josh Mitchell: I’m on any social media that you wanna reach out to me. Josh Mitchell is pretty much my Facebook, Instagram, Twitter etc. I’m on Bigger Pockets; everywhere that you can be found in real estate, I’m probably a member in that group. So if you can find me, I’m sure I’m there somewhere.

Joe Fairless: Josh, thanks for being on the show, talking about each of your five properties, talking about some challenges on day one of your first investment property, thought process, how you handled it, how you overcame it, and now you’re much farther along and have bought many more properties after that. The thought process you have when you’re buying a property and the numbers that you look at. So thanks for being on the show, Josh; I hope you have a best ever day. We’ll talk to you again soon.

For many newer investors, the goal is to create enough real estate income to have the option to leave their job if they choose. Melchor is well on his way as he has grown his portfolio from zero to 15 units in 2.5 years. Great episode for newer investors, but we also dive into some deal specifics for a little higher level insight. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Melchor Domantay. How are you doing, Melchor?

Melchor Domantay: Hey, how are you doing, Joe? Thanks for having me.

Joe Fairless: Well, it’s my pleasure, and looking forward to our conversation. A little bit about Melchor… He is a controller of a non-profit company in Chicago, a CPA who a couple days ago got his CPA license – congrats on that – and a real estate investor. In just 2,5 years he has built up a portfolio of 15 units. Based in Chicago, Illinois. With that being said, Melchor, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Melchor Domantay: Yeah, thanks Joe. I was born in the Philippines and came here when I was 17. I’m 29 now, so – regular American dream, just trying to go to college, have a full-time job… But I had a great mentor, who was actually my boss… And he told me to buy real estate. I didn’t listen to him for five years, and after that I bought my first house. It was a two-flat house-hack, and I had a great tenant. I got that first check, and then just the light bulb — you know, that investor/landlording light bulb came off. Then from there I started researching everything, educating myself, looking for the right people in my team, and then with their help I acquired 15 units in the last 2,5 years.

Joe Fairless: Well, I don’t wanna fast-forward too much… So you went from a two-flat house-hack, and in 2,5 years you have 15 units. The two-flat house-hack – how much did you buy it for, what did you have into it as a down payment, and improvement costs?

Melchor Domantay: The first house was really kind of like a training wheel. I bought it fully rehabbed, $280,000. I put 3,5% down… I had a good realtor at the time, and she taught me about doing a credit. I had a 3% credit, so really, to be honest, I probably brought all-in $7,500.

Joe Fairless: What’s the 3% credit you’re referring to?

Melchor Domantay: It’s a seller’s credit that they gave me. It was a probate, and [unintelligible [00:03:32].22] just wanted to get rid of it, so they gave the 3% credit to me… So it was a cool structure.

Joe Fairless: Okay. And is that 3% credit something that’s typical on a transaction, or how did you go about asking for it?

Melchor Domantay: To be honest, most of my deals I always ask for a credit. The reason I do is because it’s an advantage for a person to not bring a lot of money to the closing table. For example, easy math, $100,000, if you’re putting down 5%, that’s $5,000, plus any closing costs. And if you ask for 3% credit, which most lenders I think will allow – that’s the cap – then that’s $3,000 off that you don’t have to bring to the closing table… So I try to do that structure as much as possible.

Joe Fairless: Okay, so that was the two-flat. That was about 2,5 years ago. And then what did you do?

Melchor Domantay: Then after that I found a realtor from Bigger Pockets that’s also an investor, so that helps a lot.

Joe Fairless: Who?

Melchor Domantay: John Warren. I’m not sure if you’re familiar with him. He helped me a lot, he added a lot of value… And seven months after I bought a foreclosure property, a two-flat in the West suburbs of Chicago. But the cool thing about it is there’s people living in there, so it was livable. But it was a foreclosure. I bought that for $80,000. Great deal. Then I put about $15,000 of work, and that kind of like propelled me and gave me a lot of confidence to do more real estate… Because I think my mortgage at the time was $750, and I was bringing in about $2,100, so it was great.

Joe Fairless: It is. That is a great ratio there… The property was a foreclosure, but it had people living in it. Were those the people that were being foreclosed on?

Melchor Domantay: Yeah, I think they were the owner, and they just couldn’t pay the mortgage. I asked them to stay, actually… So they can just stay there, and not worrying about moving, but I think a week before I closed they left already.

Joe Fairless: Okay. So you made it a point to say it was a good thing that people were living in it… But if they moved out before you closed, what was the benefit of them living in it?

Melchor Domantay: For me, the benefit of living in it — usually, a foreclosure property, an REO, usually they have been left behind for a long time… So when people are living in it, the advantage of it is there are still some people who live in it, and that means it’s livable. Most foreclosure properties have a leaky roof, or leaky pipes, and grass is five feet tall… So that’s the advantage of me saying that it’s great that there’s people living in it.

Joe Fairless: Did they trash the place on their way out?

Melchor Domantay: No, it was a Hispanic family and they were really nice. I got to talk to them when I was under contract. I had a conversation with them and they were really nice. I asked them, “Okay, why is that you’re getting foreclosed?” and they shared with me that something happened in the family and they just couldn’t pay the mortgage.

Joe Fairless: And you put $15,000 into it… Did you do the work yourself and pay for supplies, or did you hire contractors?

Melchor Domantay: I tried, but I’m just not a handyman. That’s not my strength.

Joe Fairless: Me neither, by the way.

Melchor Domantay: I hired a lot of people. It was – keep in mind – seven months after I bought my first property, and I think I was making $35,000, so I wasn’t making a lot of money. I was still a staff accountant at the time, and… I just hustled, man. I came up with the $25,000 to close, and another $15,000 to repair it… I hustled. I was driving Lyft before work, driving Lyft after work. It’s a good thing I worked in downtown Chicago. The parking here is hard, but I was fortunate that I can park right at my office. So it was a lot of hustle, a lot of driving Lyft… Because that’s not my skill. My skill is I can drive Lyft. So if I was making $20/hour driving Lyft, and in turn I can just pay a contractor to do the same job $30/hour, I feel like that’s okay, because I don’t have to do all the learning process, being skilled about it; that’s a lot of time. So I feel the right decision for me at the time was to just drive as much Lyft as possible, and pay the contractor to do the work.

My model was always get the property as fast ready as possible, because every time the property is vacant, you’re losing money.

Joe Fairless: Did you have a general contractor who then hired subcontractors?

Melchor Domantay: No, there was a lot of handymen at the time. I couldn’t hire a GC because there’s a margin the GC charges. So it was a lot of building relationships with all my handymen, and a lot of it came from my realtor. So having a great realtor, who’s an investor as well – they would know a lot of other people.

Joe Fairless: Yes. Very important, especially with construction workers, to go through references, and good thing that you had that person. Okay, so that was the next two-flat, so at this point you have four.

Melchor Domantay: Yeah.

Joe Fairless: What did you do after that?

Melchor Domantay: After that – I think November of 2017 – I bought a three-flat, another foreclosure, again, around the same area.

Joe Fairless: And you’re making $35,000/year, you said, at the time.

Melchor Domantay: Yes, at the time. I was still focused on my full-time job too, while doing this.

Joe Fairless: Oh, of course.

Melchor Domantay: So I was getting promoted… At the time when I started I was staff accountant, and now I’m a controller. So as I go, the last 2,5 years, I was still focused on my full-time job, and not forgetting that I have that responsibility. And I have great mentors. My boss at my full-time job knows everything that I’m doing, so with the support from them and from all the team members I have…

Joe Fairless: I bring that up because, relatively speaking, it could be considered a low amount of money, but you’re buying all these properties; that’s my point. So you were getting this extra income from (I imagine) keeping your living expenses pretty low, and then also doing the side hustle of driving for Lyft?

Melchor Domantay: Yeah, the key for me to buy the next property, the three-flat, my third property, is I refinanced the foreclosure, because at the time — it was considerably low when I bought it, so I bought it right… It was [unintelligible [00:09:44].12] I think about $130,000 after, so I basically got most of my money back.

Joe Fairless: The one you bought for $88,000?

Melchor Domantay: Yes, correct. And then I used that, and then some of my 401K to buy the three-flat that I bought. It was $240,000. And I learned how to paint. I think painting is the only one I can do. [laughs]

Joe Fairless: The 401K money – did you pay a penalty? I guess you can probably do self-directed, because it’s your own deal…

Melchor Domantay: It’s a loan. You can do a loan in your 401K. Basically, you pay a minimal interest. At the time I think it was 4.5%… And [unintelligible [00:10:22].02] That’s basically what happens.

Joe Fairless: Alright. So you bought one for 240k, that’s the three-flat, so at this point you’ve got seven. What did you do next?

Melchor Domantay: So that one was a foreclosure as well. I knew coming in it’s gonna be worth $300,000 when I bought it. So right away when I bought it I just created $60,000.

Joe Fairless: Which one, the three-flat?

Melchor Domantay: The three-flat, correct.

Joe Fairless: Okay, alright.

Melchor Domantay: So I think the key for me growing really was buying it right in the beginning. Most of these properties — the two-flat was a little distressed, but not too distressed. But the three-flat was really distressed. We’re talking about carpets that animals feed on… So I had to do a lot of work for it, but right now I think it’s worth $360,000.

Joe Fairless: Good for you.

Melchor Domantay: Again, that was about 3,300 sqft. I spent mornings and evenings after driving Lyft painting, just to get it ready. It was in the middle of winter, too… But it’s a lot of hard work. I think that’s what most beginning investors lack. Because I did excited listening to your 1,700 podcasts. I’ve listened to Bigger Pockets 300 podcasts while driving Lyft… So I like to think of myself like a taxi driver; all of them have a Ph.D. in something, because I’m sure they’re listening to everything.

So it’s a lot of hard work, man… Waking up at [4:30] in the morning, not coming home till 8 PM… I think at the time I was still single. I don’t know if I can get away with that now.

Joe Fairless: [laughs] You were waking up at [4:30] in the morning, then what would you do? Just high-level, from [4:30] to 8 PM.

Melchor Domantay: At the time I would wake up at [4:30] in the morning, go paint for like an hour, and hour and a half, and then drive Lyft. Go to the gym, then go to work, and then again drive Lyft. Around probably [7:30] I’d stop and then come home and paint till 11. That was really my day.

Joe Fairless: [4:30] AM to 11 PM… For what period of time did you do that?

Melchor Domantay: I was doing that for about two, two and a half months. I got sick a couple times doing that. [laughter]

Joe Fairless: Your immune system was not enjoying the lack of sleep, plus the paint fumes, plus everything else that you were doing.

Melchor Domantay: Yeah…

Joe Fairless: Well, thank you for sharing that schedule. That is important and necessary to note, so thank you for that. Real quick, let’s go faster on the next properties. You had a three-flat, then what was the next one?

Melchor Domantay: The next one was a five-unit, so that was nice…

Joe Fairless: Alright…

Melchor Domantay: It was totally distressed… At this point I’ve been talking to a lot of people and building a lot of relationships, and then after that, that actual seller of the five-unit got me the last property, the three-unit, which is a seller finance.

Joe Fairless: Okay. Let’s talk about that five-unit – how did you hear about it?

Melchor Domantay: I found it on the MLS, put an offer that day… Just the regular MLS; all of my properties are MLS, besides the last one.

Joe Fairless: When you say “distressed”, will you describe the circumstance of the distress?

Melchor Domantay: Sure. Floors are broken, tuck-pointing needed, it smells like pee… The problem with that too is there were people in there. So there were people in there paying rent. The seller was just your typical old, mom-and-pop, and doesn’t wanna basically deal with it.

Joe Fairless: How much did you purchase it for?

Melchor Domantay: I purchased this for 280k.

Joe Fairless: 280k. So for someone who’s not in Chicago or doesn’t know the market, that sounds like a lot of money for a property that is distressed, and smells like pee, and people not paying rent.

Melchor Domantay: Yeah. I think I’d pay for it probably higher right now. That was probably around 56k per unit, if I’m not mistaken. So right now in the same area it’s probably exchanging at around 75k/unit. So there was a lot of meat on the bone, however I think all this stuff that I have to do – it’s probably just gonna even out.

But a thing that I wanna point out – because especially right now that’s how I’m looking at deals – is when you acquire it… Because I look at it long-term. Let’s say that property, for example, will net income, after I pay it off, let’s say it’ll give me $30,000/year. So if I acquire four of those, regardless of if they become a dollar — let’s say just the rent stays, and everything else stays… Which if the expense goes up, more likely than not the rent will go up. But if it stays just $30,000 after I paid it off, that’s $30,000 that I can earn without me basically doing anything. Just passing it to the management company. So that’s really how I look at deals now, and especially if the seller of the property has more properties.

It doesn’t hurt to buy it and build rapport that you can actually perform — because that’s the reason why I received the award for the seller finance, because the seller, after three months I kind of change the look of the property. They’ve been in the block, they saw how windows changed… They saw that I’m actually doing something with the property, instead of just staying like an eyesore. The seller saw that too, so — as a young guy especially, most people will say “Look, you don’t have a lot of experience”, but even if you don’t have a lot of experience, a lot of hustle, a lot of people that you know that you can leverage, it will kind of even the gap.

Joe Fairless: Thank you for sharing that. The five-unit led to an opportunity with the three-unit and seller financing. Based on your experience, what’s your best real estate investing advice ever?

Melchor Domantay: I was thinking about this, and it’s very generic, but I think the foundation of any business you can go to is knowing the purpose, what’s your Why. Because I think if you know your Why, then educating yourself becomes easier. There’s always a Why… And hustling becomes easier. Waking up at [4:30] in the morning becomes easier. Driving Lyft…

Joe Fairless: What time do you wake up now?

Melchor Domantay: Right now I still wake up at [4:30], but I do the Miracle Morning by Hal Elrod. I do that in the morning. I still drive Lyft, even though I’m a controller… But I’m more into just building relationships. The reason I wanna be a realtor is I wanna just exchange dollar-per-hour from Lyft, becoming a realtor… And I just love seeing houses, and helping people.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Melchor Domantay: I think the second two-flat I bought, the foreclosure. The 80k one. That gave me a lot of confidence to do more real estate, definitely.

Joe Fairless: What’s a mistake you’ve made on a deal?

Melchor Domantay: Trusting contractors. I think a lot of us have done that before. I think if I have one skill, it’s to delegate… But the problem I had on that transaction is I didn’t put systems and processes in place to have a checks and balance. I asked the contractor to do something, thought it was done, but I didn’t check on the tenant, I didn’t ask for pictures, and I paid the contractor… And I’ve basically just not used that contractor again.

Joe Fairless: Yeah. How much did you pay him?

Melchor Domantay: Man, I paid him $700.

Joe Fairless: And did they do any of the work?

Melchor Domantay: Nope.

Joe Fairless: [laughs] They did none of the work…

Melchor Domantay: Nope, none of it. I learned from that. That was when I was dreaming still.

Joe Fairless: Hey, it happens to everyone.

Melchor Domantay: Yes. At least it was only $700.

Joe Fairless: Right. Enough to remember, but not enough to side-track things majorly.

Melchor Domantay: Yeah.

Joe Fairless: Best ever way you like to give back to the community?

Melchor Domantay: I do go to meetups, and I talk to other investors. I just started doing a video content every week, that I wanna share with everybody, because I think a lot of the stuff that’s popular – they don’t really go through steps on how they got there. They just say “Okay, I have 100 units…”, and all that. I think sharing my experiences will help a lot of investors, especially new investors, with how to think about it. I was making $35,000… There’s a lot of people making more than that now, that I think can buy properties. I think there’s a little trigger that if they can see themselves, it would give them the trigger to pull it.

Joe Fairless: That’s why we do this show, to share your story, so it will inspire others and help others. How can the Best Ever listeners learn more about what you’re doing?

Melchor Domantay: Can I give my number?

Joe Fairless: Give your number.

Melchor Domantay: They can call me at 708-979-0852. If they’re around [unintelligible [00:19:49].24] or even Chicago area. They can also email me at mvdarental@gmail.com.

Joe Fairless: Call, text, anytime, day or night.

Melchor Domantay: Yes, yes, yes…! I don’t sleep.

Joe Fairless: [laughs] Well, Melchor, thank you for being on the show. Thank you for talking about your habits and how you got to where you’re at. The [4:30] AM to 11 PM typical day that you had for 2,5 months whenever you were repositioning one of your properties, the business plan that you take with each of your properties, which is basically you find a distressed property and you fix it up, and then you take the proceeds from that and you parlay it to something else… And in some cases, you parlay the relationship into other deals, for example that 5-unit, into the 3-unit, which you got seller financing with that 3-unit.

Thanks for being on the show. I hope you have a best ever day. I enjoyed our conversation, and we’ll talk to you soon.

Jim has done a ton of rehabs, and started getting into rental investing just a few years ago. He already has about 500 units under his belt, with a goal of 5000 in the future. Jim will break down a couple of deals for us, we’ll hear what went right, what went wrong, and what we should learn to implement in our own businesses. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“I didn’t get here by reinventing the wheel, I took one thing that worked and I did it” – Jim Huntzicker

Jim Huntzicker Real Estate Background:

Started his real estate business in 2005, has done over 500 deals

Focused on flipping for first 7 years – 95% of the 500 deals were rehabs

If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com

Lee has built his own brokerage in Chicago, focusing solely on multifamily apartment buildings. He’s here today to talk about that journey, as well as talk to us about some unique aspects of investing in real estate in Chicago. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“Understand your risk tolerances” – Lee Kiser

Lee Kiser Real Estate Background:

Principal and Managing Broker of Kiser Group

Before starting the Kiser group, Lee was the top producing apartment broker in Chicago at his brokerage

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Lee Kiser. How are you doing, Lee?

Lee Kiser: Good, Joe. Thanks for having me.

Joe Fairless: Well, it’s my pleasure; nice to have you on the show. A little bit about Lee – he is the principal and managing broker of Kiser Group. Before starting Kiser Group, Lee was the top-producing apartment broker in Chicago at his brokerage. He has a personal career transaction volume greater than three billion dollars (with a B). Based on Chicago, Illinois.

With that being said, Lee, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Lee Kiser: Sure. Background was always entrepreneurial ventures. I found my way into commercial real estate brokerage in the late ’90s, decided to focus on multifamily, on apartment buildings. We’ve had that company for eight years, the last five of which my partner joined me; she left a law career, I recruited her – yes, it’s my wife – and in ’05 we started our own niche firm, here in Chicago, a commercial real estate brokerage exclusively focused on multifamily in Greater Chicago Land. We are fortunate that we are the market leader in that niche in Chicago. So – commercial real estate brokerage, exclusive focus on apartment buildings.

Joe Fairless: What type of apartment buildings do you typically work with your clients on?

Lee Kiser: Our current average – and we track it religiously – is 34 units and 3.2 million dollars. That certainly goes up and down each quarter, but that’s typically our strike zone. Our profile, therefore, Joe, is the private investor/landlord/owner; that’s approximately 80% of the stock in Greater Chicago Land – it’s privately owned. That said, that’s our average deal size and our average profile client.

We do six flats, and we do 572-unit complexes. So anything that’s privately, not institutionally owned, as a profile client, we would target.

Joe Fairless: What are some unique aspects of doing deals in Chicago, to the best of your knowledge, compared to other markets?

Lee Kiser: I would say that there are three uniques; I’m not originally from Chicago, I’m from Carolina…

Joe Fairless: Okay.

Lee Kiser: …and I moved here in ’93… But there are three local idiosyncrasies that people looking to invest in Chicago need to know about. Quickly, those are Cook County Property Taxes – there’s an entire legal industry in Chicago for protesting property taxes, entire firms solely dedicated to that practice… And the reason is that there’s no math, there’s no logic to the process. The assessor’s office will arbitrarily assign every three years a new assessed valuation of the property; it’s incumbent upon the property owner to go and contest that. And if you don’t, your tax is going through the roof. So it’s just a normal part of doing business here – you hire a protest attorney, they work on a percentage of the savings that they’re able to negotiate on your behalf.

The second idiosyncrasy is a local concept called Attorney Review. If you’re looking to buy an apartment property in Chicago, 95% of the time local attorneys will default to a form of contract which everyone is familiar in Chicago Land – it’s the Chicago Association of Realtors contract – which has an unusual provision for attorney review and modification of the contract itself, as a contingency built into the deal. It runs simultaneously with other more standard, orthodox contingencies like inspection contingencies and mortgage contingencies, but it was a concept I had difficulty wrapping my brain around in the beginning, because if the attorneys are able to suggest modifications and then they have to agree on it, the local contract is really nothing more than a letter of intent…

Joe Fairless: Right…

Lee Kiser: And for people who are anywhere except Chicago, this is a foreign concept… So to get into the local culture, you kind of need to be prepared for that.

Joe Fairless: Well, just so I’m understanding what you’re saying – if I enter into a contract with you, I’m buying a property from you and we use a typical contract that is used in Chicago, then that will say that if after we sign the contract, if there’s something that your attorney wants to add or remove, then my attorney must agree to that, otherwise the contract is void?

Lee Kiser: Voidable, yes. Now, there are specific things they cannot change, and those are spelled out in the attorney review provision, such as price, dates etc. But all other terms and conditions are open to modification. Now, those who are fully indoctrinated into this process and are credible here within our local culture don’t abuse this, and it’s a normal part of doing business, and the attorneys just have to agree on — our clients are like “Oh, the attorneys don’t handle the legal matters…”, but yeah, for people not accustomed to this, it’s a very confusing and frustrating process.

Again, one of the three things you need to be aware of that are local Chicago idiosyncrasies – the third one is the Chicago Residential Landlord Tenant Ordinance. It is a very tenant-friendly ordinance, and there are a few gotchas in it that can get landlords in a lot of trouble… So I would say if you’re new to Chicago and new to investing, make sure you have a good landlord representation attorney coaching you, or hire a local reputable third-party management firm through whom you can learn the ropes as you’re learning to navigate the CRLTO.

Joe Fairless: What are some things that might surprise listeners who aren’t familiar with the Landlord Tenant Ordinance?

Lee Kiser: Well, we were able to get the major one changed… I’ll give you an example – up until about the last two years before Kiser Group was able to effectuate that change; it was security deposit interest requirements, meaning – of course, security deposits had to be kept in a segregated account, but then there are very specific calculations of interest, payments of which must be made to the tenant quarterly, and the rates change, and the calculations are difficult, and they must be paid on a quarterly basis as per the anniversary of the commitment of their lease…

Joe Fairless: Oh, God…

Lee Kiser: If you’ve got somebody that’s got 3,000 units and staggered starts, you can see the complexities of just tracking this… But the problem with the ordinance was any violation of it was strict liability of three times the rent that the tenant is paying. There’s no argument, there’s no defense, there’s no nothing; it was strict liability. So the attorney saw an opportunity to effectuate class action suits because somebody owns 3,000 units, they know that they’ve made one violation unintentionally, on one tenant… And they’ll send out mailers to all 3,000 tenants and start a class action; the landlord was faced with no alternative other than to figure out how to settle the suit.

We were able to effectuate a change in the CRLTO that gives landlords a limited right to cure the mistake, which is inclusive of a payment directly to that tenant, and then the ability to correct the mistake in the security deposit interest… But prior to making this change, Joe, there were seven-figure settlement awards for less than $5 of a mistake in security interest.

Joe Fairless: How was it less than a $5 mistake if it was just three times? Wouldn’t that be $15?

Lee Kiser: No, the actual infraction – the strict liability was three times the tenant’s rent. So you might be holding a $500 deposit on a $1,500 apartment, and you make a $3 mistake on security deposit interest; you owe the tenant $4,500. Now, multiply that with a class action suit times 3,000 units…

Joe Fairless: It’s disgusting.

Lee Kiser: …and you begin to see the exposure for the landlords.

Joe Fairless: But that’s changed, thankfully…

Lee Kiser: Yes, but there are other issues with the CRLTO. But as long as you’re aware of them, and you have someone coaching you, you’ll adhere to the ordinance and you’ll keep your nose clean of problems. A lot of people though weren’t aware of this ordinance and they bought buildings in Chicago, and they took security deposits, and they learned the hard way.

Joe Fairless: Just real quick, what’s a current issue that is still in play?

Lee Kiser: Most of the issues now have become much more reasonable. I would say there’s nothing in there that could be a major economic impact for a landlord. That said, the security deposit interest is another example of one that’s still there; you just have a limited right to cure. So instead of costing you millions of dollars, it might end up costing you $5,000 for a violation of the security deposit interest regulations… But you need to know that if you’re gonna own buildings in Chicago, that’s why you do not take security deposits. You just don’t even wanna open yourself up to the potential.

Joe Fairless: Let’s talk about your average size, 34 units, 3.2 million dollars. Describe that typical property, will you? How old is it, and what’s the business plan that most of the owners have… That sort of thing.

Lee Kiser: Sure. It’s a 1924 construction courtyard building, which is a 3-story walk-up type property. That property, within Chicago Land, can range anywhere from $25,000/unit to $350,000/unit, depending on the neighborhood, the location and the rent… But that is the stereotypical property that we will be dealing with.

Joe Fairless: 25k/unit to 350k/unit, depending on the area… What are of Chicago would be 25k and what area of Chicago would be 350k?

Joe Fairless: Englewood, Roseland, Auburn Gresham… These are the areas where that’ll be $25,000/unit. These are lower-income areas; all the stories you hear about Chicago with violence, most emanate from these areas. And there’s a high concentration of multifamily properties; we work in all those neighborhoods… But typically, that’s where you’ll see the lower end of that spectrum of price per unit I described.

The other end of the spectrum is primo locations like Lincoln Park, Gold Coast, Old Town… These are places where the same physical property will trade at the higher end of that spectrum per unit. Most typically in Chicago you’ll see that [unintelligible [00:13:07].01] at about the price per unit as I described as our average; something approximately $100,000/unit. Again, that’s an average across all Chicago neighborhoods. Typical working class, solid neighborhoods where you’ve got working class tenants and good transportation, you’ll see that building trading $125,000 to $140,000/door.

Joe Fairless: And then what’s the typical business plan?

Lee Kiser: Typical business plan – it depends. Many times these are bought for value-add plays, and those are a 3 to 5-year hold. What we see more commonly though is the very long term investor. Sometimes generational.

A lot of these properties will stay in the same family for years; they’re working buildings, they’re cashflow buildings. There’s a declining profile that matches that, relative to a lot of the new capital coming into Chicago. Because of Chicago’s more attractive cap rates relative to other major U.S. cities, we’re seeing money come in not only from those areas, but also internationally. We are currently doing [unintelligible [00:14:24].20] we track this, and the number is not in my head, Joe, but I think we’re currently active in 18 different countries with investors buying apartment buildings in Chicago.

Joe Fairless: When you get a call from someone who’s out of the country, what are some questions you ask him or her to qualify them to ensure that it’s a good use of your time if you continue to work with them?

Lee Kiser: What their experience in multifamily is in the U.S., how well capitalized they are, what relationships they have with local – not just U.S., but perhaps Chicago local – lenders and attorneys, and then why they’re interested in Chicago. We want to figure out how much they know about our local market, how much they know about the different areas of Chicago, and all of these are usually answered relatively early in the interaction. Maybe not on the first call, but certainly by the first meeting.

Joe Fairless: And are those similar questions for someone located in the U.S., just tweaking them a little bit?

Lee Kiser: Yeah, very similar… Because Chicago is such a local type atmosphere, and I named the three main idiosyncrasies, but there are certainly others… It’s helpful to spend the time with an investor looking to get into this market, to educate them on some of the local practices, on some of the local cap rates, what that means, and try to match it with their expectations, so that they’re not wasting their time or yours.

Joe Fairless: What are the types of terms that area winning deals, but not completely aggressive right now?

Lee Kiser: Ask me that again, I wanna make sure I understand the question.

Joe Fairless: Yeah, so if you show me a deal, and it’s a 34-unit deal, and you say “Hey, it’ll probably trade around 3.2 million”, and I’ll say “Okay, great”, and I’ll take a look at it… And I know about what the price is, but I don’t know what type of terms I should offer that are typical for your market – refundable or non-refundable, earnest money, closing dates, that sort of thing… What types of terms are you seeing?

Lee Kiser: Got it. To be attractive to the seller of a property if you wanna make an offer, exclusive of price, terms that will be most important are 1) a very quick attorney review. [laughs] If you’re using a standard contract and you’re subject to that contingency, then make it quick; three days.

Joe Fairless: Okay. Calendar days, or business days?

Lee Kiser: Business days. And make sure you have a good local counsel who’s credible, who will be known by the seller’s attorney. That will be very helpful. If you want to be competitive, your offer should not be subject to financing. That’s why having a lending relationship and knowing with a degree of confidence what you’ll be able to procure for a certain acquisition – it’s important to have that, to have the confidence to be able to submit the offer without a financing contingency.

The rest is how comfortable you are with learning and understanding the physical structure and reviewing the books and records. All that’s lumped into what we locally call inspection contingency. The more quickly you’re able to move through that on a 34-unit… An acceptable timeframe would be somewhere between 7 and 10 calendar days.

Joe Fairless: Okay, got it. And then what about earnest money? Hard, day one, or do you not see that in your area?

Lee Kiser: We don’t typically see that here. The only time we usually see any amount of earnest money, non-refundable on day one, is when it’s a very unique property and highly active in terms of number of offers. Most typically, you’ll see initial earnest money posted with the contract, all of which is refundable, and an increase to that earnest money once all contingencies are waved. So in the situation I described earlier, where you don’t have a financing contingency, where there’s a short attorney review and an inspection is done in 7-10 calendar days; at the conclusion of that inspection, the earnest money increase is triggered, and that becomes non-refundable to the buyer, except in the event of a seller default. So on a 3.4 million dollar deal, we’ll probably want to see a minimum of 1% hard; more typically we’d see approximately $100,000 non-refundable on a 3.4 million dollar deal, so approximately 3%.

Joe Fairless: Okay. And once that 7-10 calendar days expires, what amount is typically there for the additional money that’s put up?

Lee Kiser: What I described was the additional money. So on a 3.4 million dollar deal, $100,000 non-refundable at the end of the contingency periods would be very market.

Joe Fairless: Got it, okay. Based on your experience in the real estate industry and as a managing broker and an apartment broker of over 3 billion dollars’ worth of transaction, what is your best advice ever for real estate investors?

Lee Kiser: I guess know your risk tolerances. What I mean by that, especially in Chicago, your cash-on-cash returns are really going to be relative to the amount of risk associated with the property. That really speaks true as a general statement for apartment investing, but in Chicago it’s really important… Very low risk, which means great location, no deferred maintenance in the building – you’re going to be low single-digit cash-on-cash returns; 3%, 4%, 5% cash-on-cash returns. If you’re looking for a high risk, high return area – and these are heavily management-intense, challenged neighborhoods… Some of the ones we discussed in the beginning, when I was talking about the 25k-30k unit range – you can see cash-on-cash returns 20% plus, sometimes up to 50%. But it’s heavy risk. Typically, $100,000 to $140,000 units courtyard that we were talking about, in a good, solid working class neighborhood – that’s gonna be a mid-level risk. You’re gonna be looking at approximately 10% cash-on-cash returns.

I would say that the main advice I would give to someone coming in is understand your risk tolerances. That’ll help define where you should be looking and for what you should be analyzing. Take the time to learn Chicago, learn these neighborhoods, learn this architecture, learn the idiosyncrasies before you actually go out and start looking at buildings. It will narrow your search, it will help you understand the investment better.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Lee Kiser: Oh, not a single book… The Sharpe Series, by Bernard Cornwell.

Joe Fairless: What’s a best ever deal or transaction you’ve been a part of?

Lee Kiser: The best deal is to me the most challenging and complex, that needed someone with our expertise to pull off. That would have been Sheraton Plaza in Chicago. We did that deal about ten years ago. It was an affordable deal. We had HUD, [unintelligible [00:22:53].09] the buyer and the seller, and each of these had attorneys. I’ll never forget the conference call, where I am not exaggerating, I had 12 attorneys on the conference call, each representing their different client, and we got that deal closed. That was a fun deal.

Lee Kiser: As a principle, I don’t invest where I am a broker… But I have invested in other things outside what Kiser Group represents. There was a development deal in North Carolina; I got involved at the very wrong time. It was right before the crash, and there was nothing that we could have done to salvage that… So that was probably the biggest mistake I made in real estate.

As a broker, the biggest mistakes that I have made, frankly, is projecting too much upside in a property, which led me to incorrectly value it… So we put it on the market and we simply weren’t able to get people interested in making offers. That happens rarely, but occasionally, where you — look, underwriting and valuing a property is an art, it’s not a science, and we’re 97%-98% effective in it… But there’s always that one that is just a mistake, and you just have to tell the client, “Hey, here’s why I thought what I thought, and here’s why we made the mistake. We can adjust, or we can just agree to part ways now.”

Joe Fairless: Best ever way you like to give back to the community?

Lee Kiser: To the real estate community I give back through mentoring. I mentor both through DePaul University’s real estate program, as well as the Eisenberg Foundation, and I’m mentoring college students constantly. Personally, my favorite charity is NAMI (National Alliance on Mental Illness). They have a big event, an awareness walk once a year. My hobby is music, my band plays for that event gratis, and it’s a wonderful organization, a wonderful cause.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you or your company?

Lee Kiser: More about what we’re doing through our website, KiserGroup.com. Through there you’ll also see all of our blogs, all of our Forbes articles, all of the stuff in the news… You can learn all about Chicago apartments. And we’re of course easily found and accessible through that website.

Joe Fairless: I loved learning about the idiosyncrasies of investing and making offers in Chicago. Three things you mentioned – Cook County Property Taxes, no rhyme or reason for how they come up with their tax increases, so having a legal counsel to help you through that process… The attorney review contingency, as well as the Chicago Landlord Tenant Ordinance – you gave the extreme example, that thankfully has since been updated, but still things to keep in mind prior to investing in that market… As well as the type of terms that are typical for a deal, what’s competitive when you make an offer in Chicago, and then what would set you apart from the rest.

Thank you, Lee, for being on the show. I hope you have a best ever day. I really enjoyed our conversation, and we’ll talk to you again soon.

A little bit of a change up for today’s Follow Along Friday, we’re having a guest on the show with Joe. John has been on the show in the past (episode 487) and is sharing some of the best things he learned in his business last week. Of course Joe will be sharing his best lessons learned last week too. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“I struggled in the beginning with saying “I’m not good at that” and would try to everything on my own”

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff; we hate that fluffy stuff.

Today we’ve got Follow Along Friday, and – well, this is a special Follow Along Friday, because we’ve got a guest who’s going to be co-hosting this with me, John Casmon. How are you doing, John?

John Casmon: I’m doing great, Joe. Thank you for having me on.

Joe Fairless: Yeah, nice to chat it up with you on this Follow Along Friday, standing in for Mr. Theo Hicks. Theo will be back, Best Ever listeners. I’ve known John for – was it like four years or so we’ve been buddies?

John Casmon: Something like that, yeah.

Joe Fairless: Yeah, probably about four years… Great guy. He’s the host of Target Market Insights Podcast. He is a general partner on 700 units. I’ve interviewed him on the show, you can just search his name. One episode was episode 478.

I’ve been told that iTunes doesn’t like numbering the episodes anymore, so I don’t know how I’ll keep track of that moving forward, but… For past episodes, episode 478, I think you can still go check that out.

So today – Follow Along Friday, similar to other Follow Along Fridays. We are gonna talk about things that we have learned recently, or observations in our business… Not to talk about it, but more to be focused on how it will help you, Best Ever listeners. So we’re always gonna be focused on “Okay, this is what happened, but here’s the takeaway and here’s how it can be beneficial for you.”

With that being said, John, when I asked you “Do you have some lessons learned from this week?”, you snickered and you were like “Oh yeah, I’ve got some lessons learned…” So how about you kick it off? What do you have going on?

John Casmon: Yeah, we’ve got a few things going on. Right now we’re in the final stages of getting under contract on a property in the Cincinnati area, and we’ve been working with a broker on this for a little while now… And what I’ve realized is that we’ve had some conversations, and I believe he started to lose confidence in our ability to close. Part of that is because we were looking to go hard money upfront, and because of that I was asking a lot more questions about “How solid is the building? Is there any deferred maintenance? What’s gonna happen?”, all those kinds of things… And as we were asking more questions, and kind of taking our time, making sure the contract was written the right way, making sure that we understood what the out clauses were, things like that, he grew more and more concerned…

So I realized that we wanna make sure we address our concerns, and making sure that we’re not entering into a deal we’re gonna lose money upfront or don’t have any out clauses, but on the same note we’ve gotta manage that broker relationship… Because at the end of the day the brokers are the ones giving us the leads, giving us the opportunities on these deals, and we need to make sure that we’re building and strengthening those relationships. So part of me was making sure that they understood where my concerns were coming from, that we had full intentions of closing, and as long as the seller was willing to work with us on remedying any of the issues that came up, we’d be willing to move forward, but we weren’t necessarily dragging out signing the contract or things like that. We just wanted to make sure we were all operating under the same premise of “Hey, we all wanna sell and buy this property. Let’s make sure we’re putting ourselves in the position to do that.”

Joe Fairless: And why do non-refundable money day one, versus say seven business days? That way you don’t have the risk of some things coming up.

John Casmon: That’s exactly where we netted out. They started wanting us to do hard money day one; as we went back and forth on what would make us comfortable, we landed on five business days. That gives us enough time to at least get in there, see if there’s anything major that’s gonna scare us, or that we know we don’t have in the budget to fix… And if not, if they’re small stuff, we can obviously work around those kinds of issues. So that’s where we netted out, but in that process, that was like maybe the second thing that slowed down our process; and then I was just in town, looking at the property, right before we signed the agreement, and lo and behold there is a pretty substantial leak happening in the basement.

I sent the video to the broker, and then we talked back and forth about “Well, how is this gonna get fixed?” And keep in mind, we’re not under contract; we’ve agreed to the LOI, we have our attorneys hammering out the purchase and sale agreement, but we’re not technically under contract. And again, with my money going hard after five business days, I wanted to make sure this was gonna be remedied correctly… So this was something else that kind of dragged on the signing of the purchase and sale agreement, and I think the brokers are just kind of getting irritated that there’s different things that keep dragging us on… But again, I’m trying to make sure we protect ourselves and they don’t do a crappy patch job to get that fixed and “Okay, it’s no longer leaking”, but now I’ve gotta deal with this issue… And who knows what else this is; it may be an underlying issue that there are other problems at the property. So for us, it was giving us some pause, and I’ve talked to my partners about it.

So it was just one of those things where we have some concern; we still wanna move forward, we just need to make sure we protect ourselves in that process of moving forward.

Joe Fairless: And why initially come in with non-refundable day one money? Is that where the market is at with properties like this in Cincinnati, or was that something that you all wanted to do to be above and beyond what the other offers were?

John Casmon: It was to be above and beyond the other offers at that time when we were looking at it. The property actually works very nicely for us, because it’s seven minutes away from our other property, and it would give us 72 units within a seven-minute drive. So for us it provides —

Joe Fairless: It’s got a nice ring to it, too.

John Casmon: Yeah, exactly. So it gives us some economies of scale right there, and we think that that would really help us improve not just the asset we’re looking to acquire, but the asset we already have under contract, or that we are already operating. So we liked it a lot, and we think that this would be a really great addition to our portfolio for those reasons… So we felt like we could make a strong, competitive offer, that could put us into position to move forward… Plus, our investors saw it, they really liked this deal, and we felt like it was a pretty strong one. Again, we’ve been looking at a ton of different deals in the area, and not a whole lot is making sense… So this was one that did make sense, it kind of checked the boxes on a lot of that criteria that we have, so we felt willing to make a pretty strong, compelling offer to get this.

Joe Fairless: Your background’s in marketing, right?

John Casmon: Correct.

Joe Fairless: Not in construction management, correct?

John Casmon: Correct.

Joe Fairless: So therefore who are you going with to the property, who has that expert eye on construction and deferred maintenance and mechanical systems, who’s gonna say “Hey, John, hold on, there’s an issue here, and this is a major issue.” I mean, clearly, a bunch of water somewhere — I have a marketing background too, so you and I could spot that; pretty obvious. But some other things might not be as obvious.

John Casmon: Yeah, I took a contractor with me on that one, just to take a look and see “Hey, here’s roughly what I have estimated for repairs, for our renovation schedule… I want you to come in, take a look; let’s see if this looks right, what are projecting, let’s see if there’s any concerns you have…” So I took a contractor with me. Once we are under contract, we’re gonna get an actual inspection and have him go through everything, understand the mechanicals, understand everything else that’s going on… Because to your point, I have no clue; I’m not the guy to– all the roofs look the same to me. I’ve had people show me, “You see this, where this has come off?” I’m like, “No, it looks the same to me.”

Joe Fairless: [laughs]

John Casmon: I cannot tell a new roof from an old roof, so that is not my expertise at all. I definitely am leaning on contractors, inspectors, specialists; anything water – I’m gonna bring a licensed plumber to come take a look at that, who can take a look and give me an accurate quote of not just what it costs, but is this a sign that there are bigger issues at the property? Is this something that is an isolated incident, or is this something that is taking place in multiple places around the property? That’s something that we wanna bring in those specialists to help us identify things that I certainly wouldn’t be able to find by myself.

Joe Fairless: And I think starting out, I was too proud to admit what you’re saying and what I currently say, and that is I’m not an expert in all these different areas, so I need to make sure I bring in the right team members. That can be a very expensive mistake if we don’t admit that “Hey, we have a certain specialty, and we need to bring others who have the specialties that are required for us to be successful.” It’s so important to identify what we’re really good at, and then bring on those other people to compensate for what we’re not good at, or what we’re average at, because we’ve gotta be exceptional in this business. We need to be competent in all areas, but it’s impossible to gain a deep level of expertise in everything; I think it’s impossible to get deep level expertise in everything, because other people are dedicating their whole lives to it… So it’s pretty hard. Thank you for sharing that, and some valuable lessons there.

John Casmon: Yeah, thank you, Joe.

Joe Fairless: So on my side I’ve got three things, and they are — one is an observation that will be helpful for anyone scaling a business; second and third are more personal development, but they certainly have implications toward the bottom line with the business. [dog barking] That was my puppy dog Jack, barking at the UPS man; he’s thirteen pounds of fury right now.

So the first thing is West Coast team members. I live in Cincinnati. Strangely enough, it’s in the Eastern Time Zone. I don’t know how Cincinnati got an Eastern Time Zone; that’s another story. Cincinnati is in the Eastern Time Zone, which I love. The challenge is if all the team members are in the Eastern Time Zone, then when West Coast investors – I’m thinking about investors in particular – e-mail us, specifically me, and ask a question, 95% of the questions are more administrative related, so I always have a team member handle that, and then eventually they start e-mailing that team member… Like, “I wanna change my checks to receiving ACH”, or “I have a new address”, or “Were the K1’s sent out for this property yet?” Something like that.

What I’ve found is we have a West Coast team member… Her name is Chat, and she is an executive assistant for our company, Ashcroft Capital. And the dynamic of the time zones is just a wonderful thing, because if it’s six o’clock or even seven o’clock Eastern Time, well, it’s four o’clock her time, because she’s in California, and she’s able to handle those requests for an East Coast investor who’s emailing us at 7 PM, and probably not expecting a reply until the next day… And she’s able to handle the West Coast investors, who probably do expect a reply that day, because it’s 4 PM their time.

It’s something I hadn’t consciously thought of, but it’s an excellent customer service bonus… Or even, at this point you wanna exceed expectations, so I’d say it’s even mandatory, as you scale, to have a customer service person or an executive assistant be on the West Coast, so that when you do get late night inquiries, it’s still within the business hours of the West Coast person, and they’re able to respond, and investors are really impressed, they’re like “Thanks a lot for getting it addressed so quickly.” I’m always being responsive regardless of the time, for the most part, but there are certain things that our team members do, the administrative things… So I will just copy her and then she’ll address it with them, and it’s wonderful.

John Casmon: And for your East Coast time zone, do you have a different assistant who helps with the East Coast, or are you more involved in some of that?

Joe Fairless: Yeah, I do have a different assistant who helps with East Coast. We’ve got the 8 AM Eastern Time covered, and then we’ve got the 8 PM Easter Time covered.

John Casmon: Right. So you pretty much have a 12-hour coverage there, between East Coast and West Coast time. That’s pretty solid.

Joe Fairless: Yeah, yeah.

John Casmon: Have you heard back from those West Coast investors, or even East Coast investors about that directly?

Joe Fairless: Not directly, but they say “Thanks a lot for addressing this so quickly.” So they don’t say “Thanks a lot for having a team set up so that you can address it so quickly on the West Coast”, but the takeaway is they’re appreciative of it. Any investor in our deals, when you talk to him/her, they’re gonna tell you “We have top notch customer service.” I’d be shocked if anyone doesn’t give us five out of five stars for that, and this is one component.

John Casmon: Awesome, awesome.

Joe Fairless: The second thing… Here’s the problem – the problem is connected to number one, what I was just talking about, about always being responsive on e-mails, and stuff. Well, the downside to that is I’m always on my phone, looking at the screen… And it’s not healthy. I was recently interviewing someone – he’ll be on the show later, too; it’ll go live in about 30 days or so – and he told me three tips. I’ll give you two. Two tips to not being on the phone as much, but maintaining productivity. I was like “I’m all ears. Tell me. Please, please, please. I need help.” And one tip – this is pretty obvious – is to remove all notifications from your phone. Every single notification. No apps can give you a push notification, nothing. Well, I almost did that. I still have my calendar app and I still have text message. So text message and my calendar app – they still do push notifications, but I took away all the other notifications, so that I don’t get notified on a push notification whenever the app wants to talk to me… Because then I’m sucked into the world of thumb.

John Casmon: Manually, one by one?

Joe Fairless: Yeah.

John Casmon: How long did that take you?

Joe Fairless: Oh, I don’t have a lot of apps, so 3-4 minutes.

John Casmon: Okay.

Joe Fairless: And the second tip – it has made a bigger on my impact on my time on my phone, decreasing time on my phone, without losing productivity… The second thing is making my phone — he said greyscaling it, so that when you look at your phone it doesn’t look like a carnival or a wonderful playland for you to go into and spend a lot of time… All these different colors, and buttons, and stuff to play and push. Instead, just greyscale it.

I have an iPhone. I didn’t see an option to greyscale, but I did see an option — it’s called Night Shift, and it basically makes your phone like pee yellow; it’s like a filter. It’s very easy on the eyes, and a little hard to see during the day, but I don’t think I’m hurting my eyesight as a result of doing this… But you can make it a Night Shift. I actually do the Night Shift literally 23 hours and 59 minutes, because I didn’t see how you can do permanent Night Shift… So I just have it so it just recycles one minute every day. So one minute of a day it’s not this way, but otherwise it is.

That’s very helpful. It bugs Colleen, my wife; you wouldn’t believe. Whenever she looks at my phone, she’s like “I can’t [unintelligible [00:17:32].08]” and that’s the point! That’s the point, so I don’t like how things look, so I’m not on the phone, zooming around and doing stuff that is not leading to productivity.

John Casmon: So from a psychological standpoint it’s to make the phone less attractive, so it doesn’t look fun, it doesn’t look engaging, and you just do what you have to do on it to get back off of it.

Joe Fairless: That’s right, yeah. And e-mail is the number one thing I use it for, and will continue to use it for. So those are two things – West Coast team member, and two tips for not being on the phone as much, while still being productive. The third tip is I have a problem with chocolate, I’m gonna admit it; I have a problem with chocolate, and it’s something that — my family has diabetes, it runs in the family… Heart attacks, strokes, all sorts of nastiness. Although my grandmother is 103 years old, and my great aunt is 98 years old, and I’m going to visit them soon in Michigan. So the women do a great job living in my family; the men – not so much.

I’m a healthy guy. I just got a physical recently – top notch across the board. But if I don’t fix this chocolate thing, then I know where I’m gonna end up, quicker than I should. So I’ve been trying to identify, what is the best freakin’ way to stop eating as much chocolate. Because there’s sugar in everything… I believe it will be nearly impossible; nothing is impossible, in my opinion… But nearly impossible to eliminate sugar altogether. There’s sugar in a ton of stuff – fruit, everything. So I don’t wanna eliminate sugar, but I do want to decrease the chocolate. I’ve been struggling with that…

The reason I’m bringing this up is our health leads to our productivity, which leads to the bottom line of our business. So it certainly is all connected. I tried many things… Only eat desert one night a week. Well, that one night you’d better watch out, buddy. [unintelligible [00:19:28].01] That didn’t work.

Another thing I’ve done is just have it in moderation. Another thing I’ve done is just eat it within a certain window of time. Well, none of that worked… And what has worked is – you know I work with Trevor McGregor; I hire him as my life/business coach (coachwithtrevor.com). I’ve worked with him for 5-6 years; I’m not sure exactly how long. I’ve worked with him for many years. And what he taught me recently, and which I’ve implemented, which has been successful for me, is something called a 50-stack. What a 50-stack is is writing down 25 reasons for why eating chocolate will be a negative in my life. I will get diabetes; I will, as a result, lose my toes; then I won’t be able to walk Quinn, my daughter, down the aisle, when she’s married; then I’m gonna lose my leg; then I’m gonna lose my other leg. Doing some extreme examples of that, but 25 of them for what are the negative consequences of it I continue to go down the path that I’m going down.

Then on the opposite end of the spectrum, 25 positive that will result from me not eating, and eating more healthy stuff. I will be able to run around and play soccer with Quinn; I’ll be able to grow my business and optimize my performance and add more value to the world, because I won’t be focused on my health as much, or lack thereof, I’ll be focused on contributing.

This is very powerful, because it hardwired my mind to think about it differently. I eat fruit still, that’s cool, but the chocolate thing isn’t nearly as desirable to me as it previously was. In fact, I have not had a piece of chocolate since then; I’m sure I will in the future. But this 50-stack idea is a great solution for if any Best Ever listener is trying to kick some sort of habit… Because it’s a lot more powerful than other things that don’t reshape how you think about that bad habit. So I thought I’d share, because it worked with me, and I figured it could work with some other listeners who are looking to reshape something in their life.

John Casmon: That’s a great tip to share. I can imagine how visceral it is to sit and write down all of those things, especially when you talk about your daughter, and the life that you’re trying to build for her, and walking her down the aisle, and the fact that you might not be able to do that, how that can change.

I think Tony Robbins has a similar approach, where he talks about if there’s a habit you’re trying to change or you’re trying to break, you need to sit down and write all the things about why you wanna break it and what your life would be like if you don’t break, and what your life could be like if you replace that habit with a new habit. I think it’s powerful stuff, and it’s something that — we’ve got some small things that I’m trying to do as well, that I think I can take that 50-stack and implement it… So that’s a great piece of advice.

Joe Fairless: Yeah. And I’d known about the stuff that Tony talked about, but I hadn’t intentionally done it, and packaging it in a way called “the 50-stack.” And full-transparency – the 50-stack is supposed to be “50 reasons why it’s good and 50 reasons why it’s bad.”

John Casmon: Oh…

Joe Fairless: But I was like, “Dude, this is a lot”, so I shortcutted it and I made 25+25. I totally am not calling that a 50-stack, but regardless, it’s worked. Well, John, how can the Best Ever listeners learn more about what you’ve got going on?

John Casmon: Yeah, if you’re interested in attending the Midwest Real Estate Networking Summit, you can go to midwestresummit.com. You can also check out our website, casmoncapital.com to check out anything else that we’re doing.

Joe Fairless: Sweet. Well, good catching up with you. Best Ever listeners, good hanging out with you, too. We don’t have a trivia question, we’re not gonna have a review today, but we did have some helpful things that will help you along your journey. Grateful of you being our listener, and we’ll talk to you tomorrow.

There are alot of note investors, both performing and non-performing. DeAnn is here to tell us more information on the strategy. We’ll hear what to look for both good and bad, and also how to know what the worst case scenario is. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet: “Don’t fall in love with your deal, every time I see someone do this, they make a mistake” – DeAnn O’Donovan

DeAnn O’Donovan Real Estate Background:

President & CEO of AHP Servicing

Has over 25 years of experience in real estate, financial services, asset management, mortgage lending, and residential loan servicing

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Deann O’Donovan. How are you doing, Deann?

Deann O’Donovan: I’m great, Joe. Glad to be here with you and your Best Ever listeners.

Joe Fairless: Yeah, nice to have you on the show. A little bit about Deann – she is the president and CEO of AHP Servicing; she’s got over 25 years of experience in real estate, financial services, asset management, mortgage lending and residential loan servicing. Based in the Windy City, Illinois. With that being said, Deann, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Deann O’Donovan: Absolutely. In terms of my background, I started out in acquisitions, working for a public real estate investment trust, so I got great experience early on in how to underwrite, and analyze, and close a deal. Then I also went to work in 2008 for a regional bank, and got some great workout experience there. A lot of experience running acquisition teams, as well as workout teams. I joined AHP Servicing about a year ago.

We are a socially-responsible investment company, so we’re crowd-funded. Somebody can invest in our fund, and the money that we raise we then use to buy non-performing notes. So it’s an alternative real estate play in this particular role. Then we work with the homeowners to try to reposition that debt and either settle the debt with them, or modify it.

Joe Fairless: And Jorge Newbery was the founder of AHP?

Deann O’Donovan: Jorge Newbery was the founder of American Homeowner Preservation (AHP), and that company was founded in 2008, at the height of the great recession. Last year he recruited me and moved into a chairman role, and then we started AHP Servicing to bring the servicing of our loans in-house. So we now have kind of two books of business, if you will. We’ve got the loan purchase and sale business, and then we’ve also just opened our doors to servicing for third-parties, as well as servicing our own loans.

Deann, when you started in acquisitions, working for a REIT, and you said you learned how to underwrite, analyze and close a deal – what are some takeaways you got from that experience in terms of underwriting and analyzing deals?

Deann O’Donovan: That’s such a great question. What I would say is don’t fall in love with your deal. Every time I see somebody do this, they end up making mistakes, because they ignore warning signs, whether that’s the state of the market that we’re in, or the counterparties, or the financial numbers… So I think that’s really critical.

I would also say make sure you’re doing a sensitivity analysis on your proforma or financial underwriting, so that you give yourself some cushion in the deal. Everything doesn’t go right; it’s very easy to have the perfect deal on paper, it’s much harder to have the perfect deal in reality, so make sure that you give yourself that vacancy reserve, cap-ex reserve, and stress-test your own assumptions.

Joe Fairless: I’ve seen all sorts of sensitivity analysis… What are some main components – and you might have mentioned a couple already just now… But what are some main components that a sensitivity analysis should include?

Deann O’Donovan: I definitely think you need to build in a vacancy reserve, a cap-ex reserve… If I’m underwriting a commercial deal, I’m also gonna typically take it out three years and make assumptions on staffing costs, and operating expenses, and increases on the revenue side, and rents, ancillary income, so that I’m really seeing if things go well, what does it look like, and if things go bad, what does it look like… And making sure that I know what the operating margin is gonna be in all of the situations, and what my cushion is on my debt service coverage.

Joe Fairless: On the “if things go bad, what will it look like” how do you know how bad to make the scenario? Because clearly, if it’s an apartment building, for example, and it’s 100 units, if you make it 90%, then that’s bad, and the deal is not gonna work… So I imagine there’s a balance or a line that you walk where it’s like “Okay, this is how it would go bad, but that’s probably not gonna happen, so we still should proceed”, but… I know I have this bad scenario in the back of my mind, so how do you reconcile that?

Deann O’Donovan: You’re right, that is very specific on the asset class. If I was doing a multifamily deal, I would probably be looking at “Okay, what happened in the last recession? How long were things vacant for in my market, and what did I have to do to adjust the rents in order to fill those units?” Because I think that if you look back to that last recession, chances are we’re not gonna have one in our lifetime that’s worse than that, so that to me would be your absolute worst-case scenario.

Then from there I’d back off it a little bit and say “Okay, what do I actually think it’s gonna happen in the next 3-5 years?” The predictions are we’re gonna have a recession in 2020, but what do we think that’s gonna look like? What do I think interest rates are gonna be? How long is my debt? So then you can kind of back-fill what factors for my particular deal have variability that I need to understand that risk for, and make sure I’m comfortable taking that level of risk.

Joe Fairless: In 2008 you went to work for a regional bank, and you got, as you call it, “workout experience.” As someone who isn’t in the lending industry full-time – but I work with lenders, obviously – you’re talking about working out loans when people are behind, so you’re figuring out how do you work out the scenario so they don’t default and you don’t have to foreclose on them… Is that correct?

Deann O’Donovan: Yes and no. The company I worked for was Wintrust, they’re a regional bank – and they acquired a lot of other failed banks from the FDIC… So they hired me after they acquired the largest bank failure in Illinois history; it was a company called [unintelligible [00:08:10].10] It was a billion-dollar portfolio.

Joe Fairless: Wow.

Deann O’Donovan: And I’ll tell you, in the first 90 days on the job I wrote off probably 15 million dollars, or more.

Joe Fairless: What do you mean wrote off 15 million?

Deann O’Donovan: I’ll give you an example – there was one deal I was looking at where it had already defaulted, and when I took a look at the underlying security, that collateral for the loan, it was not a real estate deal; in this case the collateral was virtually worthless. It was worth maybe ten cents on the dollar… So then you really have to get creative.

Joe Fairless: Keeping whatever privacy you need to keep, but what could that be, that they initially used as collateral, that was perceived to be worth so much on a large loan, but then was worth ten cents on the dollar?

Deann O’Donovan: So in this particular deal that I’m thinking about it was a bundle of life insurance policies, and they had done an actuarial analysis basically, like the life insurance policies, the beneficiary benefit had been assigned to this company, and they had done an actuarial analysis on basically when are people supposed to die, and that actuarial analysis was incorrect, and there were a whole host of other things; they hadn’t collateralized it right… And the reason I think that’s such a great example is it was a very clear example of people closing on a deal where they did not understand the deal.

They didn’t have sufficient knowledge of the industry, they didn’t have sufficient understanding of what happens when that deal goes bad, how do you fix it, and what do I really have to collateralize that loan? I think that’s relevant to any industry, but it’s especially relevant to real estate; when people are moving into a new class, you’re dealing with different counterparties, or maybe a different lender for the first time – you really need to understand how that deal is put together and how that deal could unwind, and what you’re gonna do if something goes bad.

Joe Fairless: What an experience… First 90 days on te job. You started out quick. Did you know that was what you were getting into? It’s 2008, so I imagine you knew the sky was falling, so that’s probably what you were gonna be focused on when you got hired there…

Deann O’Donovan: I did. I did know that the sky was falling, and previously when I’d worked for a REIT, I had done large public company bankruptcy work and restructuring, so if we had a large tenant that went bankrupt, I would be the one working with our attorneys to figure out how do we restructure it, how do we rewrite the leases, what collateral do we need, what kind of margin do we want [unintelligible [00:10:42].13] or whatever it may be… So that was a very helpful experience. But taking on a massive portfolio of primarily defaulted or near-default, primarily commercial real estate, but also consumer debt and C&I deals… It was a lot of fun, I loved it, but it was a lot of balls in the air.

Joe Fairless: Oh yeah, I bet that was an intense job.

Deann O’Donovan: Yeah. And I would say you learn so much more by working at somebody else’s bad deal than you’re ever gonna learn doing a deal yourself on the front-end… Because you see everybody’s mistakes. I used to tell the guys on the team that were younger “You’re gonna be an amazing underwriting, and you’re gonna be amazing at putting new deals together when the market turns, because you’ve learned from all of these mistakes that these other lenders made over the last ten years.” That’s amazing experience.

Joe Fairless: What are some mistakes you’ve seen that you’ve taken lesson from, that you can share with us?

Deann O’Donovan: Well, I was thinking about that in advance of this podcast, because I think you ask really probing questions, which I very much appreciated… And one of the things that I think I’ve learned is the more you can figure out for yourself what your drivers are, the more you’re gonna figure out why you like the real estate business, and why do you like it part-time or why do you like it full-time.

For me, the reason I love it is I’m a builder; I love putting deals together, I love building teams, I love doing new business, I’ve launched a lot of new product lines, moved companies into new lending areas… And one of the appeals for me about AHP Servicing was, frankly, taking a company that had a small book of business on the loan trading side, and then this new business that they were starting up on the servicing side… For me, that’s a blast. But for a lot of people, the knowledge that they’re gonna be working 60 or 80 hours a week and there are all these systems to put in place is overwhelming and disheartening, but for me that’s what gets me up in the morning. So the more you can figure out what gets you up in the morning and how does that relate to what you do professionally, and how do you want it to relate to what you do professionally, then it becomes play that you get paid for. Not that you’re not working hard, because I work very hard, but you’re passionate about it, and that makes all the difference. So I think that’s one thing.

Then I think the other thing is being intentional about who you’re doing business with, and making sure that you’re doing business with people that you can trust and people that you respect.

Joe Fairless: Any tips on qualifying those individuals in advance of doing business with them?

Deann O’Donovan: I’m a big believer in references and test drives. So if I’m looking at a new vendor, for example, we have a really robust due diligence process, especially for critical vendors. That includes talking with references and other clients, because you learn so much more in a five-minute conversation than you’re gonna learn by going through their annual report and their [unintelligible [00:13:41].02] Not that you don’t need to do that, but you do need to also talk to people who have done business with them, so that you make sure that you’ve got that DNA alignment between the organizations. And I’ll tell you, that served me incredibly well in my career.

As I’ve moved jobs, I’ve had co-workers and employees that have worked for me who have said “I wanna go where you’re going”, and I’ve also had attorneys and other vendors that when I know I need somebody, that’s the person I’m gonna call, because I’ve got that 5-year, 10-year, 15-year trusting relationship with, and I know they’re gonna give me a straight answer.

Joe Fairless: What’s been the main challenge as CEO of AHP Servicing?

Deann O’Donovan: I would say the main challenge was doing everything all at once. In my first 90 days at the job I had four different systems implementations or conversions I was working on, I was hiring a management team, I was closing out a fund, I was putting systems in place, and understanding the processes, and taking the reins over from Jorge, and picking up the relationships that he had developed over a decade… So when I would put my company project list together, I kid you not, it was five pages long.

So prioritizing those things and making sure that they’re all not just getting done, but getting done well, and being done in a way that’s going to create the infrastructure to take the company from 5 to 10 million, to 15 million, to 100 million, makes a really big difference… Because once you’ve got that infrastructure and that scale, and people understand how the company runs and you’ve defined that company culture, it will be much easier to take this company from 15 million to 500 million.

Joe Fairless: When you have that five pages long list of things and you’re going about prioritizing them, what type of thought process or system do you use to do that prioritization?

Deann O’Donovan: What’s the most critical, what order do things need to happen in? Then once they’ve happened, what do we need to go back and back-test? What kind of people do I need to hire that I can delegate some of these things to, and trust that they’re gonna keep them running? How much autonomy do I give them, and then how do I check back in a way that feels good for them, rather than them feeling like I’m checking their work, where it’s truly collaborative? I think that’s incredibly important as well. I’m a big believer in collaborative companies. So I’d say those are some of the key things.

Joe Fairless: Just as a refresher for Best Ever listeners on AHP – will you just give everyone a refresher on what you all do? I know you’ve briefly mentioned it earlier, but it’s a very cool concept, that I think is a win/win for everyone. I’d just love to talk about that a little bit.

Deann O’Donovan: We actually internally have crafted a business model that I refer to as a win/win/win/win…

Joe Fairless: Oh, okay. There’s an Office episode on that, where Michael Scott resolves conflict between two co-workers and he tries to get win/win/win/win scenarios…

Deann O’Donovan: Oh my gosh, I just saw that a few weeks ago! That was pretty funny.

Joe Fairless: Yeah, yeah… [laughs]

Deann O’Donovan: So to answer your first question, what we do is we do a series of funds – we have a current fund open right now, and it’s open to both accredited and non-accredited investors. They can invest in our offering for as little as $100. We then use the money that we get from that offering to go out and purchase defaulted loans. Then we work with the borrower to try to come up with a cooperative solution to their past due payment status. If they’d like to keep the loan, we’ll modify it, reduce the principal, reduce their monthly payments, and make it affordable for them, so that they can stay in their home.

If they’ve already vacated the property or they would like to get out from under the debt, if the title is relatively clean, we’ll take a deed in lieu of foreclosure, we’ll bring that underlying collateral into our portfolio as real estate owned, and then we’ll sell it. We underwrite those loans on the frontend, so that we have a pretty good idea of if we have to take that asset back, what it’s worth and what we’ll be able to sell it for.

Then the win/win/win that I was talking about, our philosophy is we are socially responsible, so we’re trying to create funds that are good for our investors, so our investors get a return of up to 10%. We’re trying to create solutions that are good for our borrowers, where they get to modify or settle their debt, and hopefully go on to rebuild their credit and have a good life. We’re trying to do something that’s good for our communities, because nobody wants a vacant, moldering, decaying property sitting next door while it’s going through a two-year foreclosure process, right? That’s terrible for the community. It invites drugs, it invites vandalism… It’s just awful.

And then finally, we’re trying to create a company culture that’s good for our employees, who really come to work knowing that what they do matters in somebody else’s life.

Joe Fairless: Yeah, I was waiting for the employees to be part of it, and if they weren’t, I was gonna add another win to your win/win/win/win… But you got it covered, so… Four wins.

What is your best real estate investing advice ever?

Deann O’Donovan: I think my best real estate investing advice gets back to what we were talking about earlier, which is be deliberate and don’t fall in love with your deal. Sometimes the best deal is the one that you never do.

What I say to folks here is you have got to be willing to walk away from the deal if it no longer makes sense. We just had a situation at the end of the year where we did that. Somebody tried to cram us down literally on December 31st, and I was like “Not gonna happen. Sorry, guys. If you change your minds, let me know.”

Joe Fairless: What were some specifics on that that you can share?

Deann O’Donovan: They wanted to capture the upside after we completed our due diligence, without crediting us for the downside, where some of the loans were significantly less than they had indicated that they were worth… So they sort of wanted to have their cake and eat it too, and we said “That’s not how we underwrite, that’s not how anybody underwrites in this business. If you can get your deals done that way – God bless, go do it, but we’re not gonna close and we’re not gonna be pressured to make that deal at year end.” They ended up coming back a week later; we just closed it, and I think we got to a place that was good for them and good for us… But you have to be willing to say no.

We had spent probably 40k or 50k in due diligence, so…

Joe Fairless: Wow!

Deann O’Donovan: But I’d rather not do a deal and eat that cost than do a bad deal that I spend 18 months regretting after I close.

Joe Fairless: Right. Where does that cost go, that 40k-50k in due diligence prior to making the transaction happen?

Deann O’Donovan: When we’re buying a loan, we’re ordering basically three pieces of due diligence from third parties. One is a broker’s price opinion (BPO). That lets us value the underlying collateral, and we need to do that to make sure that we’re buying the debt at the right level, so that we’ve got a cushion there.

Then we order a title report and we take a very forensic look at the title to make sure that if there are any gaps in title, we can complete that curative work… Because the last thing you wanna do is buy a loan and then find out that you can’t foreclose or you can’t take a deed, or you can’t modify it because somewhere there was a break in the title, so you can’t prove clean ownership.

Then we also order a tax report, so that we can see if there are any due taxes, because those are typically credited against your purchase price when you close.

Joe Fairless: Okay.

Deann O’Donovan: So if you’ve got a big deal – let’s say that’s $300 a loan, all-in (I’m rounding up there), if you’re doing that for every loan and it’s a big enough deal, those dollars add up.

Joe Fairless: Got it. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Deann O’Donovan: I am ready!

Joe Fairless: Alright, then let’s do it. First, a quick word from our Best Ever partners.

Break:[00:21:19].06] to [00:22:25].16]

Joe Fairless: Okay, best ever book you’ve recently read?

Deann O’Donovan: I would say The Alchemist, by Paulo Coelho. I go back and read that every couple of years.

Joe Fairless: Why every couple of years?

Deann O’Donovan: Because I think you get different things out of it. It’s a very simple story, it’s a quick read, but it’s kind of a classic hero’s quest story about finding your destiny… So it’s something that not only have I come back to, but I’ve given that book to more people as gifts over the years than probably any other book.

Joe Fairless: Best ever transaction you’ve been a part of?

Deann O’Donovan: Well, I would say maybe the deal that we just closed that I was referencing… Not because it’s the best deal that I’ve ever done, but I think it was — I’m training a couple of new traders right now, and I think it was the best deal that they’re going to see in terms of the discipline and the other things that we’ve been talking about.

Joe Fairless: Yeah, a case study in real life, and they’re working through it.

Deann O’Donovan: Exactly.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Deann O’Donovan: A mistake on a transaction… Well, I think getting pretty far down the line on a deal with a new counterparty, and then discovering that they’re just not reputable in terms of how they do their deals. One of the things that I feel very strongly about is I do not retrade my deals. If I tell you I’m going to buy something from you, I am going to buy something under the terms that I agreed to… So for me that’s a really big pet peeve when somebody–

Joe Fairless: [laughs] Do you invest personally in real estate?

Deann O’Donovan: I do, but in a small way. I’ve got some single-family rentals, but they’re all passive. I’m so busy with my day job… I would love to have time to do some multifamily or other asset classes, but right now…

Joe Fairless: You’ve got your hands full. The reason why I ask that is in your personal investments when you agree to buy it for X, I’m sure during due diligence something comes up. Something must come up, where it’s like “Wait a second…” They weren’t being dishonest, it’s just due diligence, inspector reports, something comes up… So in that scenario, did you just say “Hey, I’m gonna agree on the initial price, all good” or did you go back and say “Let’s knock it down a little bit” or did you just say “I’m not buying it.”

Deann O’Donovan: If there’s something material that comes up on due diligence – absolutely; I think it’s appropriate to go back to the table. When I say “retrade”, I’m really talking about somebody who when it gets to the finish line there’s no communication along the way, and then suddenly they’re like “Well, I’m not gonna close unless I get X and Y in addition to what we agreed on”, or they try to knock the price down without having a justifiable reason for doing that.

Joe Fairless: Okay.

Deann O’Donovan: I view that as distinct. The whole reason you do your due diligence is to see “Did I price it right?”

Joe Fairless: Best ever way you like to give back?

Deann O’Donovan: Really through AHP Servicing. I love the business model, it’s one of the reasons I joined the company, and it feels amazing to go to work knowing that you’re doing a good thing.

Joe Fairless: How can the Best Ever listeners learn more about what you all are up to?

Deann O’Donovan: They can connect to me directly at ceo@ahpservicing.com. They can check us out online on our website at www.ahpservicing.com, or they can give us a call at 866-ahp-team.

Joe Fairless: Well, thank you so much for being on the show, Deann. I really enjoyed our conversation, from the lessons you learned starting out, working for a REIT on underwriting and analyzing deals, to the regional bank that you worked at, and the example of when you talked about the first 90 days, and you wrote off 15 million dollars or more, and discussing that… As well as, obviously, what you and your team are doing now at AHP. Certainly a win/win/win/win scenario with your business model.

I really enjoyed our conversation, great catching up. I hope you have a best ever day, and we’ll talk to you soon.

We all want to increase our net worth (usually). Mark is a financial planner and here to talk to us about how he has been able to increase clients net worth by over $500,000,000. One great way he does this is through real estate, and pairs it with whole life insurance. Confused? Me too, until I listened to his explanation in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Mark Willis. How are you doing, Mark?

Mark Willis: Good, how are you doing?

Joe Fairless: I am doing well, nice to have you on the show. A little bit about Mark – he is a certified financial planner, and he has written two books, and one of them he just published; you’ve gotta go check it out, it’s called “How to be an Amazon legend and fire your banker.” That is the name of the book, I’m not gonna continue — that would be a really long title. Mark is the owner of Lake Growth Capital Financial Services, which is a financial firm in Chicago. He has increased the net worth of his clients and their families by over 500 million dollars, and you can learn more about his company at LakeGrowth.com.

With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mark Willis: Yeah, sure. I’ll keep it brief. I listened to Dave Ramsey all too well as a young adult growing up, getting out of college. I came away from that experience with six figures of student loan debt and no plan to pay it off in the middle of the Great Recession, looking for work.

Joe Fairless: Oh, wow.

Mark Willis: So does that sound like a great start, or what?! [laughs]

Joe Fairless: Yeah…

Mark Willis: Soon after we moved to Chicago – not the least expensive city in the world – and just was cranking at trying to do as many different income streams as possible. All of my training taught me that mutual funds, mainstream financial investments were the pathway to financial freedom, including of course Dave Ramsey. If he says it, it must be true. So we were plowing all of our money towards student loan debt, until we found out there were better ways to do it.

I guess that’s a short enough background… I ended up getting some state licenses, I got my certified financial planner designation, opened up our practice here, Lake Growth Financial Services, and I’ve been having just a ton of fun ever since.

Joe Fairless: What were the better ways that you found out that you should do it?

Mark Willis: Oh, man… Well, first of all, the traditional retirement planning system or industry in this country seems to have a very clear picture of where we all should be putting our money, which is in their pocket, right? So every dollar I put into investments, and mutual funds… Well, you have to keep in mind, I’m a post-recession planner, so every dollar I was putting into my investments were going down, down, down. Meanwhile, the student loans were requiring that giant mortgage payment, essentially. So we had to find something that wasn’t tied to Wall-Street, something that put money back in our pocket rather than taking it out of our pocket every month… Something that would grow predictably for us.

That really is what spurred us on to find other financial products and vehicles that more closely aligned with what we were trying to do and what we were trying to accomplish. And honestly, Joe, it gave me a chance to think critically about what Dave was saying on the radio every day, which is something I just had never really paused to think about. Obviously, your listeners know very well, the benefits of real estate — and of course, there’s drawbacks to real estate as well, but the point is thinking carefully and critically about what you want your money to do for you is probably more important than any product or place you might put your money.

Someone once said “If I had to choose between Tiger Woods golf clubs and Tiger Woods’ golf swing, I’d take the swing, over the clubs”, right? Same with financial vehicles – it doesn’t matter how great that golf club is, you can mess it up if you’ve got a bad swing… Just like any financial product, whether it’s mutual funds, or real estate, or anything else. It comes down to “What is the strategy behind the product?”

Joe Fairless: So what are the top three places where you put money, in order of most money to least?

Mark Willis: Yeah, okay… Well, you look back over the last 2000 years – where do people honestly keep their cash? Well, one, you can go back even further, the pyramids – that’s kind of the first and best case of real estate, right? So the three places people keep their cash are real estate, businesses, and then paper wealth.

We have been taught mostly that paper wealth – 401K’s, mutual funds, IRAs – is the only place to put it, wherein that is the least efficient way to generate financial independence. So the question is, again, what do we really want out of our money? What do we want it to do for us?

The top three places we put our money and our clients’ money – one of my favorite places is in real estate, because it provides so many great tax benefits. Typically, it’s non-correlated to the stock market, it gives you money in your pocket at the end of each month, rather than taking money out of your pocket every month… But even that can’t stand on its own. You really need some various different assets that complement the real estate product. That’s sort of like nitro and glycerin; if you can add the right combination of financial vehicles together, and you can really get some awesome, explosive growth, if you can just put the right products together to create a strategy. Again, it’s not about golf clubs, it’s about the swing. It’s not so much about one real estate, or another business, or another investment, it’s about how do you combine those things together to create a plan to help get you from where you are to where you wanna go.

Joe Fairless: That makes a lot of sense. Just so I make sure I heard you correctly – top three places that you put your money is 1) real estate, 2) businesses, and 3) paper wealth, in that order?

Mark Willis: That’s right.

Joe Fairless: Okay. And now you mentioned it’s more about how to swing the club, not actually having the club, so using that analogy, what are the strategies within each of these three that you employ to do the best you can within each of them?

Mark Willis: Well, there’s probably more there than I can probably answer in a short episode, but…

Joe Fairless: We’ll go with real estate first and we’ll see where we get from there.

Mark Willis: Sure. One of my favorite discoveries in all of this, in my tumbling down the rabbit hole of things that don’t necessarily have to deal with Wall-Street and its kissing cousins, is a combination of real estate and solving the problems that most real estate brings with it. What are the problems that come with real estate? Well, let’s think about it for a minute.

There’s no guarantee that that asset will continue to grow. And when it does grow, historically speaking, over the last 100 years, it’s only been 1% above inflation, according to Robert Shiller. Of course, it’s not free to maintain or buy or sell real estate, and you’ve got this pesky problem of tenants not paying rent, or vacancies in your portfolio.

It’s important to realize that even real estate is only worth what someone’s willing to pay for it when you sell it. Until then, all you have is a Zillow [unintelligible [00:08:49].18] which isn’t worth a whole lot. And there’s really no control over the equity in real estate. So do you have control over the equity in there, or do you have to ask a banker every time you need a HELOC or need some money out of that property. And is that money in the house, or in the condo, or in the apartment complex that you own – is it guaranteed?

If you think about it, when are we most likely gonna need cash? Just kind of stop and think about that for a minute.

Joe Fairless: When they don’t wanna lend us cash.

Mark Willis: Right, yeah. During a crisis, when banks are least likely willing to give it to us, right?

Joe Fairless: Mm-hm.

Mark Willis: When is the price of your real estate likely to be at its lowest? Probably right at the same time, during a crisis.

Joe Fairless: Yup.

Mark Willis: So there’s pros and cons to everything, but one of the most interesting combinations of assets that I’ve ever seen is a mixture – again, nitro and glycerin, peanut butter and jelly, Thelma & Louise… If you put the right two things together, they do great things. A mixture of all things – of real estate and dividend-paying life insurance. That’s been one of my strategies to work on with clients, that’s provided some blend between the best parts of real estate and the best parts of the business model, which is an insurance contract. If you want, I can go down that path and explain how that works.

Joe Fairless: Sure. Please.

Mark Willis: Okay. So if it’s designed correctly, an insurance contract is literally a unilateral contract between you, the real estate investor, and the insurance company, which is a business. So instead of using Wall-Street’s model, you’re using a business model. And that business model is typically an insurance business – it just so happens they sell life insurance, but it’s a business that’s been profitable every single year for over 100 years.

Imagine if you were an attorney and you were offered partnership with an attorney law firm that’s been around for over 100 years and always posting profits. That’d be an awesome deal to be offered equity share or partner share in that kind of business. That’s sort of what a mutually-owned life insurance company offers. When you purchase one of these contracts, in essence, you become an owner in that 100-year-old mutual life insurance company; you co-own the company, along with all the rest of us policyholders.

This is different than term insurance, which is just about the death benefit; just renting that death benefit. Instead of renting the death benefit, this type of cash value life insurance, Joe, is permanent, and it builds equity, just like when you purchase a home you’re building equity. And that equity is called cash value. The cash value is the money you can use for everything; not just your personal needs, but buying real estate, too.

So when you have one of these contracts, the contract guarantees you an annual cash value increase, meaning your equity will guaranteed be more this year than you had last year. On top of that guarantee, they’re throwing you dividends, profits from their profitable business, because you’re an owner… You get a dividend payment on that cash value every single year on top of what they guaranteed you. Before I move on, any questions on anything there so far? Anything that makes sense?

Joe Fairless: I have one of these contracts, so no, I don’t have questions, but please continue. It’s an interesting aspect of what we do.

Mark Willis: Yeah. Most people see it, and they’re like “Life insurance? I don’t need that. And Dave Ramsey says it’s all bad.” Again, this is a contract, it’s a business model. You are buying into a life insurance contract, yes, but the business itself is less important as to what the money is doing inside that contract. So again, once it’s there, you’ve got this big pool of contingency capital. What could you do as a real estate investor with a six-figure, seven-figure pool of opportunity cash? Well, I could come up with a couple ideas; I don’t know about you, Joe… But once it’s in there, you can use it for everything.

You could use it for purchasing a property, or several properties. You could use it to pay the property tax on your building. You could use it to float you when tenants don’t pay rent or there’s vacancies in your property. You could use that cash anytime; there’s no government restrictions, there’s no required minimum distributions, there’s no prohibited transaction, unlike a self-directed IRA or a self-directed 401K. There’s no prohibited transactions, there’s no self-dealing rules. The government can’t put limits on how much you put into one of these contracts, or tell you when you have to take the money out.

In four simple steps, here’s how you can fire your banker and become your own mortgage company to yourself. Step one, open up one of these life insurance contracts and use the equity, the cash value in your policy to purchase some real estate. Because of the kind of contract – and this is maybe the most important part of the whole thing, Joe – if it’s designed correctly… And that’s super-important to keep in mind; if the policy you bought was designed correctly, the cash will continue to grow, even when you borrow that money out.

I’ll say that again – if you took a loan against your cash value, the policy will keep paying you growth and dividends as if you had not touched a dime of it.

Joe Fairless: Yeah, because you have the policy; that doesn’t change. You’re simply borrowing against it, so the original principal that you put in the policy is what you’re making the dividend on.

Mark Willis: Absolutely. If anyone here is familiar with how HELOCs work, your home is gonna appreciate in the neighborhood whether you have a HELOC or not, right? You’re just using your home as a collateral for that cash in the HELOC.

Joe Fairless: Yeah, good analogy.

Mark Willis: Same way to use it with the life insurance contract, if it’s non-direct recognition. So many people think they have one of these policies and it turns out they don’t, because they have what’s known as direct recognition loans. Lots of great mutual life insurance companies out there, but they’re offering direct recognition loans, which lowers the dividend when you borrow against it. If it’s non-direct recognition, you get that sweet, beautiful sensation.

I took a loan a few years ago, my wife and I spent a month in Hawaii. While we were there, we got the dividends, even on the money we had pulled out of our accounts to go to Hawaii. It’s such a cool feeling. It’s like a no-guilt vacation.

So first step – use the cash in the policy to buy your real estate. Two, the policy is gonna keep growing over here, even on the capital you borrowed. Three, you get to decide your own repayment schedule when you wanna repay that loan. A lot of our clients decide to use rent money to help repay that policy loan, so they can free that dollar up in the policy to spend on the next real estate.

And then four, whenever you’re ready, you sell that property and recycle the money back into your policy. Those are the four simple steps to firing your banker.

Joe Fairless: And I know I’m just adding fuel to the fire with you, you’re gonna like this comment – when you die, it just gets the money that your spouse or whoever would receive… If when you die you still have that loan outstanding, it just gets deducted from that total amount, and you still get paid out, which is a nice feeling, because you can always have a loan out there, and know that when you die, it’ll just take care of itself by being deducted from the sum that your beneficiary would receive.

Mark Willis: Super, super-awesome, Joe. I love it. Yeah. Thinking about that for just a quick minute, just to use some simple numbers, let’s say that your cash value is 200k, and let’s say your death benefit was two million. Let’s say that you took a loan for as much as you could. Let’s just say you could access about $200,000 of that cash value. Typically, they’ll let you have 90% or so.

Just for simple math, let’s say you had a loan of 200k, and you use that 200k to buy a piece of real estate. And then let’s say you got your wings that night, you graduated, you passed away. Now, a lot of folks are like “Well, why the heck would the insurance company do this crazy deal where you’re getting growth on the money even when you borrow against it?” and you just answered it, Joe – when you pass away, if there’s a loan on the policy, the life insurance company has been off the hook for that loan amount. So instead of giving your family two million bucks, they’ll take two million and minus out any loan on the policy. So they’d get 1.8 million, and of course, the real estate that you just bought the day before.

Mark Willis: Yeah, yeah. That’s the thing, it’s a non-recourse loan on life insurance, and so yeah, they are the family in this case.

Joe Fairless: Okay, got it. I was following you, I just wanted to make sure I was —

Mark Willis: Yeah, cool.

Joe Fairless: It’s something I’ve done a lot of research on over the last couple years. It seems like black magic, quite frankly, when you hear someone talk about it, but… I had to read multiple books, and I’m in a policy right now and I’m going to see how that goes, and go from there.

Mark Willis: For yourself, Joe, and for many of your listeners, if they’ve also heard it, I’d be happy to share two or three different strategies for how that combination works in these minutes we have here.

Joe Fairless: Yeah, please.

Mark Willis: Alright. I’ll just run through a few of these… These have been just so fun to really think up with my clients over the years. The first would be simple, straightforward, small stuff like homeowners’ insurance, property taxes, HOA specials, repairs and maintenance, the down payment on the property – all of those are just drags on your yield for your real estate, and if you could use an asset that would grow, even on the capital that you were spending for those regular assessments and expenses, you’re increasing the yield without any additional market risk. You’re overcoming opportunity cost.

In my opinion, using these policies is better even than paying cash directly for real estate, or big purchases. So that’s the simplest, easiest, smallest step to take. The next step would be to pay cash from a policy loan, just straight up be a cash buyer. Using a policy loan, you can get access to this money in about 3-5 days. So when you see a deal you like, request your loan. I had a guy who took a loan for $350,000 and went to cash close on the property, and bought the property as a cash buyer, and got the property, and now the policy itself is still continuing to grow. That increased his ROI as the policy was growing, and the real estate was growing at the same time.

Another option – and I’m just kind of flipping through these…

Joe Fairless: These are loans that you do have to pay an interest rate on, so what’s the typical interest rate that you pay?

Mark Willis: Yeah, the interest rate depends on the insurance company you work with. I’ve seen them upwards of usury rates, or as low as 5% simple interest.

Joe Fairless: What’s a usury rate?

Mark Willis: Oh, usury – it’s kind of a derogatory term for super-high, like with credit cards. I’ve seen 10%, 12% policy loans, compounded… Not fair, I don’t think. Most of the companies I recommend have 5% simple interest, and only compounded annually in arrears. That’s like a mouthful there, Joe; basically, what that means is – rule of thumb, if it took you four years to pay the loan off on your policy, you pay about 1.9% APR.

Joe Fairless: Got it. Okay.

Mark Willis: Quick example, this guy who had the $350,000 loan, with some other deals he was doing, and the rent money he received on that real estate he bought, he was able to get the loan paid back in about five years… He paid a 2.1% APR, which worked out to $38,000 of loan interest. That’s real, actual money that’s a finance charge on the life insurance loan, so why the heck would he do that? Why wouldn’t he just pay cash, and not have to pay interest on his own money? That’s what Dave Ramsey would say, right?

It’s important to remember that the policy was growing more than the loan interest that he was charged. So he paid – I’m just looking at the numbers here on this particular example… He paid $38,000 of loan interest over five years, which is a 2.1% APR on his loan, but his policy grew – without him adding any money to it – over $119,000 at the same time. [laughs] Plus the house was growing in the neighborhood, too.

That gives you a higher yield — even when you think through the loan interest, even when you factor it in… That’s what we call positive arbitrage.

Joe Fairless: When you go to secure one of these — and you call it a whole life insurance? Cash value? What’s the exact term you use for this?

Mark Willis: So part of the reason why I went through the extra hoops to being a Bank on Yourself, authorized advisor, Joe, is because there’s so much misinformation out there in the market. I kind of view the Bank on Yourself Authorized Advisor program as kind of the one and only quality standard, so that consumers know “Hey, if I get a policy from a Bank on Yourself Authorized Advisor, I’m gonna get one that’s truly designed correctly, with a non-direct recognition loan, and it’s a dividend-paying whole life policy from a mutual life insurance company, with paid up additions…” I mean, that’s a mouthful; that’s not even the full list there. And if it’s gonna be taxed in retirement or not, and if it’s gonna be limited by the insurance company in terms of how much you can pay in – all that stuff I’ve seen unfortunately with people who thought they had one of these (other people call it a certain thing), it’s been called cashflow banking, it’s been called infinite banking…

Joe Fairless: Got it. Alright, fair enough. So you’ve got the Bank on Yourself term. Okay, I’m with you. So my question is not everyone can get a $100,000 policy, because the insurance company needs to make sure that it’s not overwhelming financially for the person, because it’s not a “one-and-done, you put 100k into it.” You have to feed that on an annual basis… Or am I missing something?

Mark Willis: Great question, Joe. Most of the time, folks are wanting to keep their money somewhere. Your money has to live somewhere. And most of the time, people think they’re gonna need to pack more money away later; so yes, most of our clients are packing more money in every single year. But you know, a good chunk of our clients do single premium contracts. This is where you just take one lump sum, you’ve got some money in a CD that’s just kind of souring, the CD not earning a lot of interest, and you just put the money into a policy, and it gives you all the advantages we’ve described, without having to come up with more cash next year.

Joe Fairless: So if it’s not a single premium policy, then is it called multiple premiums policy?

Mark Willis: Probably, I don’t know. It sounds right.

Joe Fairless: That would be logical…

Mark Willis: Yeah, that makes sense.

Joe Fairless: Got it. Alright, fair enough. Based on your experience as a certified financial planner, what is your best advice ever for real estate investors?

Mark Willis: Wow. Well, we’ve been talking about a cool concept, but of course, we have to do the disclaimer that “Hey, I have no clue what your goals are, what your transitions are, what you’re trying to accomplish…” I’m describing a concept that may or may not even fit your particular situation, so my best advice ever is think more carefully about your function of money than about the label that you put on it. Think more carefully about “What do I want this one dollar here to do for me for the rest of my life?” and think less about whether I can get 5% or 6% rate of return, or “Is this the latest hot stock, or best cryptocurrency?”

Take the labels off the money, and think about “What do I want that money to do for me?” Because where you put your money makes it do different things.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Mark Willis: The best book I’ve read recently – Never Split the Difference, Chris Voss. I love it, great book.

Joe Fairless: Best ever transaction you’ve done?

Mark Willis: I think investing in my CFP, probably the best transaction ever. It gave me the biggest, broadest view of how money really works.

Joe Fairless: How much does it cost to be a certified financial planner?

Mark Willis: They take your soul, and then they take about 4k. [laughter]

Joe Fairless: How long does it take to study to become one?

Mark Willis: About three years, I guess. It was a little bit longer than three years for me.

Joe Fairless: And is that because you took three years, or the process takes three years?

Mark Willis: You could technically, if you were doing it full-time as a student, probably get it done in two years. I was working a job, growing my business here, so it took another little bit of time.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Mark Willis: Paying off debt, rather than saving in one of these policies first.

Joe Fairless: Best ever way you like to give back?

Mark Willis: I love the idea of helping people become better versions of themselves. So rather than pouring into someone, I’d love to draw out from them the best parts of themselves.

Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about what you’ve got going on?

Mark Willis: Check out our podcast, NotYourAverageFinancialPodcast.com, and if you’d like to chat further about some of these strategies – obviously, Joe is very aware of this strategy – I’d love to share some more with you if you’d be open to it. Click on “Book a meeting” on our NotYourAverageFinancialPodcast.com website, and if you mentioned the Best Ever Real Estate Investing Podcast, I’ll be sure to include a free copy of my latest book, compliments of Joe.

Joe Fairless: Awesome. Well, thank you so much, Mark, for being on the show. I am a proponent – clearly, because I’m doing it – of the strategy that you mentioned, and I’m glad that we got to talk about that and went deep into it… As well as your overall approach to investing, both not just in real estate, but also in other vehicles, too. And it’s not just the vehicle, it’s the actual strategies within each, and making sure that that’s the right fit for individual goals.

Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Mark Willis: Thanks, Joe. Thanks for willing to have me on your show. It’s been a pleasure.

Weston set a goal to specialize and be the number one seller of 2-4 unit properties in Chicago. Goal accomplished! With his brokerage and team around him, together they are the move the highest number on 2-4 unit properties in all of Chicago! Weston saw this need years ago and went all in. Hear how he has been able to have such great success.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

We profile 1 nonprofit or cause every month that is near and dear to our heart. To help get the word out, submit a cause, or donate, visitbestevercauses.com.

TRANSCRIPTION:

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Westen Harding. How are you doing, Westen?

Westen Harding: I’m doing great, Joe. Thanks so much for having me on the show.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Westen – he owns and operates X Plus Real Estate. His team is currently the number one brokerage for 2-4 unit sales in all of Chicago. His team closed on over 20 million dollars in sales in 2017, and is on track for 40 million dollars in sales in 2018. Their website is xplusrealestate.com, and there’s a link to that in the show notes page. Based in Chicago, Illinois. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Westen Harding: Sure. Thank you so much for the Best Ever listeners for tuning in today. A little bit about my background – I actually got started selling real estate in college, in Texas Tech University, Go Red Raiders!

Joe Fairless: Yeah, Guns Up, baby!

Westen Harding: Guns Up! So I sold real estate there, which was just your standard single-family homes for like $75,000, and then I moved to Chicago after graduation and decided to get into commercial real estate. So I was actually selling larger 20-unit plus apartment buildings, and while doing this, I started doing a lot smaller 2-4 unit deals to kind of get my feet wet, and I noticed that there was nobody else in this market; this was back in like the early 2000s and I said “You know what, I’m gonna go ahead and make a goal for myself to be the number one seller for 2-4 units in all of Chicago.”

In 2010-2011 I started my own brokerage, X Plus Real Estate, where from there I’ve just been cranking away, building a team, up to a team of about 6-7 people now, and as Joe mentioned, we’re the number one seller of 2-4 units in all of Chicago.

A little bit more on last year’s numbers – our sales were on average 13.8 days on market, and had 98.9% list price, so just crushing that right now. On top of that, I own a number of properties, and I’m actually gonna currently gonna be liquidating my portfolio to buy some bigger stuff out of Chicago.

Joe Fairless: You own properties in Chicago?

Westen Harding: Yeah, I actually had a portfolio of about 6-7 three to six-unit properties that my wife and I owned, and then we decided last year, as the company was growing, that it just became more of a conflict of interest to keep buying stuff. Cherry-picking deals for myself isn’t the best thing for my clients and for my company, so we decided to start liquidating that portfolio and start looking at stuff out of state, some ground-up stuff as well.

Joe Fairless: Ground-up development – that’s a gutsy move. What gives you the comfort level for doing ground-up?

Westen Harding: Recently, last year I bought a project that was a complete gut in the Avondale neighborhood in Chicago, and we took that all the way down to the studs. That was a 4-unit property, and we actually just sold that for $937,000, which is the highest sale for a 4-flat ever in this Avondale neighborhood. We looked at what we did there and we talked to our contractor, and it’s like the only two things we didn’t do was put in a foundation and build the exterior walls… So why not take the next step and see if we can find the land for a relatively good deal and just build from the ground-up… So that’s what we’re doing.

Joe Fairless: You sold it for $937,000… What did you buy it for?

Westen Harding: We bought it for $307,000.

Joe Fairless: And how much did you put into it?

Westen Harding: 275k.

Joe Fairless: 275k… Over what period of time?

Westen Harding: Best contractor ever, it only took him four months.

Joe Fairless: Wow. Amazing. I’m not as familiar with Chicago… It’s within the Chicago city limits, Avondale is?

Westen Harding: Yeah, it’s within the Chicago city limits, it’s on the blue line which goes from O’Hare to downtown. It’s a [unintelligible [00:04:46].27] neighborhood.

Joe Fairless: So I believe I heard you say you’re looking to invest out of town, so the one difference in the ground-up development – and I imagine it would be a big difference – is that it would be away from your backyard, whereas this was in your backyard, so how do you mitigate the risk there?

Westen Harding: We’re actually gonna do the ground-up stuff in Chicago, but we’ll be doing all the other purchases outside of the state.

Joe Fairless: Alright, I hear you. With the brokerage, you are on pace to double from last year to this year in the transaction volume… What do you attribute that to?

Westen Harding: We’ve spent a ton of money last year redoing our website, so now when you type in “4-unit Avondale” or “4-unit Humboldt Park”, we’re the number one thing that shows up. So we’ve done that, as well as I’m an investor myself, and all my clients are investors, and I just asked them what they wanted most, and everybody said the same thing – “I want a website that I can go to, specifically created for smaller investment properties and click on a property and then have it auto-populate a proforma.” We actually created that.

So if you go to our website, xplusrealestate.com and click on a property and click Proforma or Investor in the top right corner, it’ll create a proforma for you for what’s currently on the MLS. So we did that, which has boosted us a lot, as well as we’ve just done a significant amount of marketing. We have a database with every 2-12 unit owner in North West Side that we reach directly out to, as well as marketing through online e-mails, as well as old-school mail marketing as well.

Joe Fairless: That’s incredible So you just click that Investor calculator – I’m on your website – and then it pre-populates a proforma… How did you determine what benchmarks to put in the proforma for each property?

Westen Harding: Benchmarks in what sense?

Joe Fairless: Taxes, insurance, maintenance…

Westen Harding: Yeah, so the taxes is just drawn off the tax records, so it’s the tax from last year. Maintenance is just the numbers — we do so many of these deals that we put in what our average deals see. We went through a bunch of our previous sales and just kind of compiled where those insurances were coming out at, what the average gas bill was, what the average electric bill was, and then just used an average number to put in there.

Then the other really cool thing on benchmarks is that if you look, there’s one column that is the actual how it’s running, and then the next column over is actually gonna be a column that is an algorithm built into our website that’s always changing, that pulls up what the current rent would be for a two-bedroom one-bath, that has washer and dryer in the unit, as well as an updated kitchen… And that’s always changing. That’s kind of a cool feature, you can see immediately from that proforma what it would be like if you updated your kitchens and baths.

Joe Fairless: It really is very impressive. I have not seen this on a website. You can even delete everything that your team has in here and put in your own stuff and calculate it, right?

Westen Harding: Exactly. The great thing about investing in real estate is everybody has their own ideas and own way that they run their numbers, so to be able to give you at least a framework to work from – we thought that would be great.

Joe Fairless: Yeah, it’s really cool. Then you can download it… Great stuff. How much does it cost to build a website like this?

Westen Harding: Great question. It’s a lot. I think we spent somewhere about like $20,000-$30,000. I think that was the cost for everything. And there’s other numbers that run on the back-end of that website… We can constantly pull what the average 3-unit or 4-unit is selling for in an area or in a zip code… So it does a lot more than just what you’re seeing on the front-end.

Joe Fairless: Yeah, that’s great stuff. With what you’re seeing right now in your business – not necessarily in the market, but just how your business is evolving, where do you see your business evolving to in the next 5-7 years?

Westen Harding: Great question. This year has been an immense change; even in the last 2-3 years I’ve normally been running with one assistant, and then last year I decided to grow the team. So we went from myself plus one, and then I hired two more people. Then just in the beginning stages of this year we were getting so overwhelmed with clients that I hired two more people. So we’re up to now two buying agents, a selling agent, a closing coordinator and we have somebody who just does all our rentals… Because we have so many people that we sell to the four-units that they wanna rent those properties out that we’ve decided to take that in-house as well. So I think the next couple steps is hiring a couple more people, and then just growing to certain other parts of Chicago.

Currently, we’re really based on like North and North-West side – moving that out to maybe farther West and farther North is probably our next move.

Westen Harding: Oh, man… “Is this a good idea?” That’s probably the question I get the most.

Joe Fairless: So they’re starting out.

Westen Harding: Yeah, I would say — we do buying seminars bi-monthly, and free… Anybody who wants to come, they can come to those. We discuss house-hacking, that’s probably our biggest topic, as well as how to finance a house-hack, what goes into living in one unit, what you’re expecting from being a landlord…

The biggest thing I get asked all the time is “Once I live in this property and I have other people living with me, what can I expect?” What I normally tell people is that it’s really scary the first time that you do this or you decide to buy a property, it’s a big purchase… But at least what I’ve found out and what most of my other clients find out is after three months of owning a property and living there, not a whole lot goes wrong, knock on wood… But once you do it, you’re kind of like “Alright, I’m making money” or “I’m living for free. Let’s go do another one”, and you can kind of get easier with the next purchase.

Joe Fairless: What’s a question that you’re not asked but you should be asked?

Westen Harding: I think the question I don’t get asked enough is “What do I do next for financing?” Normally, people get so focused on their first purchase, but “How do I go about buying the second one?” I think is probably the thing that people need to think about on their first purchase more. There’s so many different types of financing available, and I think it’s really important to look at all aspects of that. We have people we’ve worked with for years – big banks, as well as small local banks that can do deals that other people can’t.

Joe Fairless: What’s a doable goal for a client of yours to achieve through the purchase of a 2-4 unit right now in Chicago?

Westen Harding: Great question. I was actually running the numbers on this earlier today, because we’re gonna be doing a big video campaign coming up… But normally, your purchase is gonna be about $700,000 for a 4-unit, give or take, so you’re gonna be putting down around $25,000 with an FHA loan, so getting into that… Then your mortgage amount I think comes out to around $4,500. You’re living in one of those units, you have the other three rented out between $1,350 and $1,500. You’re either gonna be living for free or come really close to it.

We normally like to see our clients living in one unit, that’s normally a 2-bedroom 1-bath, not paying more than about $500/month.

Joe Fairless: And then what has been an example of a potential client coming to you with a goal where you’re like “Sorry pal, I can’t deliver on that.”

Westen Harding: The biggest misconception people get is that there’s so many two-flats in Chicago, so we’ve got a lot of people that say “I wanna buy a two-flat.” And through education and just helping people look at the numbers, a two-flat is a very hard property in Chicago to make yourself live for free.

We normally start with them saying “I wanna buy a two-flat” and then after a month there are a couple conversations of explaining, they say “You know what, yeah, probably a three-flat or a four-flat is a better way to go.”

Joe Fairless: Based on your experience, what is your best advice ever for real estate investors?

Westen Harding: Oh, best advice ever by far – get out there and look at properties. I meet so many people that are like, “I’ve been looking at properties online and running proformas for the last two years, and I’ve already got enough money to buy a property, but I can’t make that step.” My team and I are here to help you get out there and look at stuff. Even if you don’t buy a property, we’d love to teach you and educate you on that process, because eventually you’re going to be confident enough in the investment to make the purchase.

So my biggest advice ever is get out there and find yourself a broker – if it’s us, if not, somebody else… Make sure you get out there and start looking at properties.

Joe Fairless: When you host a bi-monthly event, what is the flow of the event? If I were to look at like an agenda or table to contents…

Westen Harding: So the flow is always gonna be two types – it’s either gonna be like a fireside chat with myself and normally moderating with some other expert, whether that’s a mortgage person, or a property manager… So it’s either gonna be that or it’s gonna be a panel discussion. We’ll have two or three people that are experts. The most recent one we did was like an Airbnb; all of our Airbnb investing in Chicago and how that’s changing smaller multifamily properties, and we had three top people from that field.

Then we do a couple questions, and then we do an open question and answer where the audience gets to ask questions, and then after that everybody sticks around normally for a couple beers, so you can talk to them one-on-one as well.

Joe Fairless: What’s been the most challenging time you’ve had as a real estate professional?

Westen Harding: I guess this will also go with the biggest thing I’ve learned, I guess. When I was originally starting out and the business was growing, I started getting overwhelmed. I got so many clients and so many listings, and there’s only so many hours in the day… And I actually had a good friend of mine who was looking to purchase a property, and I started to show him places, but at the same time I had so much more on my plate… And after about a month or two he actually decided to go with somebody else [unintelligible [00:15:02].20]

Joe Fairless: Big wake-up call.

Westen Harding: Exactly, huge wake-up call, and I was like “I knew I needed to get an assistant…”, so I hired my first assistant. From there, I just was able to delegate a lot more and give tasks away… So I think the biggest change that I’ve made is after I hired that first person I hired, the second, third, fourth person all was a matter of a year or two, and that was amazing.

Joe Fairless: I remember reading Gary Keller’s Millionaire Real Estate Agent – even though I’m not one, I read it – and he said the first hire should be your assistant… So after reading that book, within a week I had a job posting up and then within three weeks I had hired my assistant.

Westen Harding: I read the same book and I got to the same conclusion. [laughter]

Joe Fairless: Fair enough. With your team, what compartment do you work with the most?

Westen Harding: I probably work with the sales side the most, mostly because people selling properties – it’s a lot to ask of somebody to come into your home, and you really want somebody to evaluate what that’s gonna be worth… So mostly I’ll meet with every seller of the property that we’re gonna sell. I’ll come in and give a free evaluation of what it’s worth, as well as where I think we can push the value.

A couple other things that are really interesting about our company is that we will pay for professional photographs upfront. We pay for that, there’s no upfront cost for selling a property through us. If we don’t sell your property, we don’t get paid. So mostly the sale side.

Then on the buy side, I’ll meet with the client normally the first time out. I’ve got two amazing full-time buy side agents, and all they do is look at investment properties. That’s all they do all day. They drive people around, and once it goes under contract, it goes to a closing coordinator… So once you go under contract, you have a dedicated person to help you get through the closing. That also leaves our buying agents to really look for the best properties and focus on their clients, which is great.

Joe Fairless: Switching gears to where you’re headed from an investment standpoint – you said you’re looking for land to build on… How do you run those numbers?

Westen Harding: It’s actually really simple. Once you know what your build cost is gonna be, you just backtrack to say “Okay, I know what I can sell it for, I know what I can build it for, and now I know what I have to buy it for. If I want X amount of profit, it’s gonna be X number.” So it’s just working it backwards to figure out where that’s gonna make the most sense.

Joe Fairless: And what level of profit makes the property and the project pencil out?

Westen Harding: Normally, I like to see at least 100k, if not more.

Joe Fairless: And your contractor that you work with, how did you get to know him or her?

Westen Harding: I actually met him through one of the people who was — one of my assistants actually was roommates with the son of the contractor. So we met through him, and then him and I just kind of hit it off, and he did an amazing project for me on our first deal, and then I’ve given him all my other smaller projects of smaller things that I wanted to rehab, as well I as I gave his name and number out to all my clients.

When you work with us, we have an open Rolodex. Anybody you need, we have… And we’ve had relationships with or dealt with and worked with in the past. So working with him was just a great experience, and I give his name and number out to all my clients now.

Joe Fairless: My follow-up question would be if we’re in another market that you’re not in, what’s your suggestion for finding a good contractor? Or maybe it’s just finding a real estate brokerage that has a contact working that angle, or is there something else?

Westen Harding: We actually had a contractor before this contractor – actually, three contractors before this contractor, that we got like heavily burned on… Like, really badly burned, like $100,000 burn on… And we wound up – my wife and I, and my wife is very A-type personality, and that’s a great thing, and she’s very detail-oriented, and she said “Next time we hire a contractor, you have to vet them.”

Joe Fairless: That’s a good rule.

Westen Harding: Yeah, it’s a very good rule, something that I didn’t really do a lot in the beginning of my investing. It just kind of worked out [unintelligible [00:19:15].19] So what we do now is if we’re gonna work with a contractor, we have a long list of questions, we go over the project in detail to make sure that it seems that he knows what he’s doing, as well as we’ll ask to see current projects that he’s working on, talk to current people he’s working with, as well as a number of past people that he’s worked with as well. So it’s very much a vetting process of a lot of phone calls to make sure that he’s gonna do what he says.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Westen Harding: Best book I’ve ever read is Never Eat Alone by Keith Ferrazzi.

Joe Fairless: How have you applied the insight from that book into what you’re doing?

Westen Harding: It’s all about networking, and I think that’s the biggest thing in real estate or most businesses – the more people you know, the more people are gonna refer your business, the more people that you’re gonna be able to help with their business. That’s a big key to the book and in general about networking – don’t always look to help yourself; if you can look to help two other people out, they’re gonna think of you when they need real estate, or a contractor, or whatever that may be.

Joe Fairless: Best ever deal you’ve done that we haven’t discussed?

Westen Harding: The best ever deal I’ve ever done was my first house-hack. I bought a four-unit property in Avondale, in 2010, for $235,000. It was not the same area it is today, it was a little rougher, but I was able to live in one of the units, moved out all the tenants and moved in newer tenants, updated the units, and I was actually not only living for free, but I was making about $1,200/month, so it was amazing.

Then actually as of two weeks ago I sold that property for $787,000.

Joe Fairless: That’s a good return, 205k to 780k…

Westen Harding: It was a very good deal.

Joe Fairless: What brokerage did you use to sell it — no, I’m kidding. [laughs] What’s a mistake you’ve made on a transaction?

Westen Harding: The biggest mistake I’ve made was hiring the wrong contractor. That’s the biggest mistake I’ve ever made. It lost us a ton of money. We bought the deal luckily at such a low price and the market went up, and I was able to bring in a different contractor and we teamed up to finish it, and then we’re planning to flip out of the deal together and split the profits, but he wound up falling in love with the building and wound up just buying it from me, and I was still able to make a little bit of money.

Joe Fairless: Best ever way you like to give back?

Westen Harding: I am actually on the board of directors of the Harold Eisenberg Foundation, which is an amazing foundation. They help young people coming out of college or in college learn about commercial real estate. They do free mentorships, they do a free career day, they do site visits, they do a number of things including a case competition… But it’s an amazing organization. If you’re ever coming to Chicago or ending college and thinking about getting involved in anything, I would definitely check out the Herald E. Eisenberg Foundation.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Westen Harding: I’m gonna go ahead and throw out a cell phone number. This is our office line. If I don’t pick up, somebody from my team will pick up. You can call or text this, it’s 312-669-4343. Or you can find us on the web at xplusrealestate.com, and we’re here to help with any small multifamily transaction. If you’re just getting into the business and wanna know anything about it, give me a call; I’ll grab a coffee with you. If you’re looking to sell your property, we would love to do that as well.

Joe Fairless: And I also recommend checking out X Plus Real Estate, the website, just to look at how it’s put together. It’s certainly a unique format, with the investor proforma and the numbers populating, and then you can change the numbers based on how you wanna run it, and you can download your proforma. Really, really cool. Nice work on that. It makes sense that that is paying dividends, and the beauty of it is you invested 20k-30k in the website, and the lifetime value of it greatly exceeds that investment, I’m sure.

Thanks again for being on the show, talking about your evolution as a real estate investor and entrepreneur, what type of deals that you do as an investor, what you’re looking to do in the future with raw land, how you pencil those numbers, as well as how your brokerage is on pace to double in sales from last year to this year.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Sam is here today to explain how he can get people approved when they’re getting denied. Specifically, he tries to get people as many properties financed with residential financing. Since residential financing is the cheapest money around, this is advantageous for investors.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

List and manage your property all from one platform withRentler. Once listed you can: accept applications, screen tenants, accept payments and receive maintenance tickets all in one place – and all free for landlords. Go totryrentler.com/besteverto get started today

TRANSCRIPTION:

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Sam Sharp. How are you doing, Sam?

Sam Sharp: I’m doing well, thank you. How are you?

Joe Fairless: I’m doing well as well, and nice to have you on the show. A little bit about Sam – he is the executive vice-president of national sales at Guaranteed Rate. He’s funded over one billion dollars – with a B, one billion – in loans. He specializes in highlighting various strategies to ensure clients secure the best financing options. He’s based in Chicago, Illinois. With that being said, Sam, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sam Sharp: Sure, I appreciate that. Yeah, actually we’re getting close [unintelligible [00:01:48].00] over 1.5 billion, so I look forward to crossing the threshold on the two billion market here. It’s a goal of mine to reach in the next – [unintelligible [00:01:56].11] probably by the end of next year.

I’ve been in the industry now for just over 16 years, I’ve been working heavily with purchase production, as you know, in the mortgage finance world. Now I work with residential financing, so I help people purchase residential homes up to a 4-unit property…

And as probably most of our listeners would know, financing has two main facets. One is the refinancing. A lot of people in the business will look to just refinance a loan to improve their status; other people look towards purchasing homes, so it obviously helps them to buy their home, or you can help them adjust their financing on their home.

I’ve started out in the industry and I immediately was drawn towards purchases, because I realized that if I helped someone buy their home, chances were that I’d have a good chance to help them refinance their home later on if there was ever [unintelligible [00:02:44].08] So I focused on this, working with a lot of first-time homebuyers [unintelligible [00:02:47].16] and then of course, as you start to progress in your career, this led me to come in contact with a lot of investors. Not only am I myself an investor and do I buy investment properties and invest in real estate, but I obviously now come in contact with a lot of individuals.

So I was kind of sharpening the tools in the shed, if you will, trying to help individuals go through and learn how to maximize their investment: how to leverage our cash, how to go through and obtain financing in a lot of cases from a more out-of-the-box perspective; what can they do that might help them overcome some of the restrictions.

At the end of the day there are going to be lending guidelines and restrictions that will keep some people from qualifying for a loan, so my goal is to figure out “How do we look for any options that are available? How do we navigate through those channels that are still open to help people obtain money?”, which of course is beneficial, because residential money tends to be the cheapest money available… So that’s why a lot of people will turn to me for my services.

Joe Fairless: And Best Ever listeners, just a little bit of background… I met Sam at Brie Schmidt and John Casmon’s conference, MidWest Real Estate Networking Summit in Chicago. I sat next to him, and we have some mutual friends and they spoke highly about Sam, so I was like “Hey, I’d love to have you on the show.” That’s how we got connected. So I have a little bit of context with what you do, but not a lot, because we didn’t talk a lot about your business.

So I guess what would be helpful, since we’re primarily real estate investors on this show, is to give maybe a case study — let’s start out with a case study of an example of someone you’ve helped and what their situation was as an investor, the challenge, and what the solution you all came up with was.

Sam Sharp: Sure, and I have a few different examples I could give you. I would like to use something that’s more immediately relevant, basically more recent. One of the things we love to do is we try to figure out how can someone obtain as many financed properties as possible using residential financing?

A client will come to me and figure out “How do I get into purchasing this property with a lower down payment, and how do I continue to repeat that?” So I focus my efforts on looking at options that will help a client go through and purchase a property and put as little down, obviously, and then what will be their option for the next 2, 3, 4, 5 properties as they look to move forward.

I have a client right now who’s looking to come into our market and wanted to purchase a unit; they’re gonna live in the property… So they’re gonna buy a 4-unit property, they wanna live in one of the units, and then they wanna rent the other three out. Now, they own another property, so they were gonna look to go through and set this up so that they can look to obviously move in and continue their investing.

Well, we have a conventional loan program that will allow someone to purchase with as little as 5% down on a 4-unit property [unintelligible [00:05:38].14] because it will allow for a competitive interest rate, lower mortgage insurance, and of course, you can have that mortgage insurance removed… So when someone puts less than 20% down on a property, they encounter PMI, so we always wanna look at that PMI, which is probably the mortgage insurance. We always wanna look to figure out when can we eliminate that, because that’s an added expense. We can improve their return on their investment by going through and eliminating that.

So the client wanted to see how could they take advantage of this. Well, unfortunately, one of the caveats with that loan program is that you cannot own another property. So when you’re going through, if you own another property, you [unintelligible [00:06:17].16] can no longer use the 5% down conventional loan, and that’s why my focus is usually to try and guide my clients to start with this type of loan. When I work with investors here in Chicago and they’re looking towards moving towards that multi-unit platform, and again up to four units, I’ll talk to them about them about looking to use this type of financing first, because it’s the only time they can do it; once they own a property, they’re in a position where they no longer qualify.

Well, in this case I have two borrowers who are looking to purchase. We started looking at it, and let’s just say one buyer could qualify without the other one, but that was the buyer who already had a property in their name… So what we ended up doing… We were able to set up and facilitate a transaction where the other borrower — we set it up to where they purchased that property from the first more qualified borrower; we’ll call him the co-borrower here, so as to keep things clear. I don’t want it to be confusing.

The co-borrower ended up buying the property from the borrower, and we used equity from the property as their down payment. We were able to use the gift of equity. So they didn’t even have to go through and use any down payment. We just basically rearranged their financing, so now our co-borrower had a property in their name, but the primary borrower did not.

Now they’re able to go through and they can look to purchase that property, and they’re buying that property with 5% down. So I was able to restructure it. Even though sometimes someone might have looked at it and been like “I’m sorry, but you own a property and you can’t qualify.” I looked into it and said “Okay, how can we try to rearrange your debt so that you could qualify.” After we’ve done that successfully, now what happens is they purchase that property with 5% down, and after they’ve been there for a year, now they can look to buy another multi-unit and this time go through and use FHA financing.

FHA financing is a government-insured financing that also allows for a lower down payment… So in this case it’s actually even than the conventional, 3,5% down. So when I work with the client, they’ll look to utilize that first conventional loan with 5% down, because again, if they own another property — if they would use FHA first, then they couldn’t use this options. We have to go through and we have to stay in order as far as how we use the loan program. So I structure this with my client; the guys are now going through and purchasing with a 5% down, then they’ll buy their next property with FHA, which allows 3,5% down… FHA doesn’t have any restrictions on either of them owning any other property, so now we’re able to put them both back on the next property together, so that they can continue to qualify without any type restrictions… Or if we start to need the income from the co-borrower or things of that nature, it’s not a problem.

So we’re able to now go through and I’ve helped them effectively leverage 8,5% to get into two properties which range up to about a million and a half dollars between those two properties, or actually closer to 1.7. So they’ve been able to leverage 8,5% to get up to about 1.7 million, and they’ll look to move forward after that and they’ll be able to actually move on and they could purchase a single-unit now and go back through — and if they were going to occupy that property (because sometimes investors decide they may not wanna live with their tenants anymore) now they’re going through and they’re able to use that, and they’re able to go through and purchase using conventional financing again with as little as 3% down.

Now if you’re following the math on that, that’s 11.5%… So basically, if you use the loan limits for conventional and FHA financing, that’s about 2.1 million dollars that they’ve put in their portfolio with only 11.5% into it.

That’s a really good example of how I’ve helped someone recently, who at face value did not qualify for this type of strategy; we restructured what they were doing, we got them into line to qualify, and now they’re well on their way to moving on towards their next property. Hopefully that gives you a good example.

Joe Fairless: Did you diagram that out for the investors, to say “Hey, trust me on this, here’s the approach…”

Sam Sharp: I have not — I’ll be honest, I didn’t have any type of written diagram. It was just a verbal conversation and more of a plan of attack. I do spend a lot of time with my clients, speaking with them and trying to conceptualize and verbalize those concepts to make sure that they have a good understanding… But I did a pre-recorded video on how to do this, and now I’m actually going through and we’re having that translated into not exactly a PowerPoint type of thing, but more of a written illustration. So it’s not something that I’ve done, but it’s something that I’m doing right now.

Joe Fairless: You mentioned earlier you have sharpened your tools now, as it relates to working with investors… What are some other types of challenges that you’ve come across with investors in a solution(s) to those challenges?

Sam Sharp: Sure. To give you a few examples… So right now — again, keep in mind, most of my focus is how we can use cheap money, and that being generally a few conventional methods of financing. Conventional financing has restrictions on how many properties you can have financed. You can only have up to ten properties using conventional financing, and after that you have to start looking for other avenues there.

Joe Fairless: How are you defining conventional financing?

Sam Sharp: Conventional financing is anything that’s gonna be following through the warranted guidelines through Fannie Mae and Freddie Mac, and in one case being FHA for one of those loans… But it’s anything outside of a hard money loan, commercial lender, portfolio product… Just basically defining it as conforming loan limits, conforming guidelines, adhering to the regulations that are dictated by Fannie Mae and Freddie Mac.

Sam Sharp: Yeah, and then the reason why that’s a benefit is because it’s cheaper. You’re gonna get a better interest rate, you’re gonna get 30-year fixed money. A lot of people don’t realize when they get into investing that most of your financing outlets are not going to be these long-term fixed products. There are some great products that are coming about in the marketplace, but they’re generally gonna be at a higher interest rate, so the best way to get a more stable return on your investment and to have that set ROI is going to be coming from working with this type of money. So when someone gets to ten properties, now they have to start looking for less conventional methods, which can be more expensive.

Well, what I’ve done to kind of sharpen the tools is that we’ve gone through now and we’re able to identify that these are — what defines those ten properties are gonna be conventional… Anything that’s financed on a residential property. Commercial property doesn’t count, so if you have a commercial loan, it’s not gonna go towards that limit of ten properties, but as you get through, once you have ten residential properties, we can actually move forward now and I can connect them with commercial loans that will allow them to blanket one loan over all ten properties, effectively financing that into one commercial loan. Now they get to start all over with that ten count.

So it was a way that I was able to work around and show like “Hey, you know what? You’re not locked in. We can improve your situation”, and that’s been really beneficial, because people are able to buy more properties now for cheaper money. That was one way, something that we’ve gone through and made that adjustment…

Another thing that would be relevant staying in that line – as I’ve mentioned before, a lot of these plans of action will be based off of the buyer living in the property. We’re still not even addressing the straightforward 25% down, because with a multi-unit with conventional financing, you generally have to have 25% down once you’re no longer gonna live in the property.

Well, what we look to do now is we’ve looked to form these partnerships and synergies with other investors that have clients who will go through and buy a multi-unit and they’ll look to put 5% down… Well, they have family members and other people who now wanna do the same thing, but they don’t have the capital. So they form partnerships with them, which is absolutely 100% legal, in which case they’re able to contribute the capital to where now their family or friends can go through and they can purchase this property, and they can live in that property. So now they can take advantage of a 5% down program again.

Now, in this case, in this instrument you’ve got someone who’s able to go through and leverage that investment. They’ve now figured an investment strategy where they’re helping other people benefit and follow that path, but they’re also able to hold on to ownership in those other properties. Their investing capital, they can have whatever investment agreements that they want with those partners, and they’re able to branch out and basically leverage their cash even further. So that’s another example of something I’ve done to kind of sharpen those tools in the shed, if you fill. A real play on my last name… [laughter]

Joe Fairless: For the ten properties that we then roll into a commercial loan, we then can start over at zero for conventional financing, because we don’t have any conventional financing – real quick, that’s true, correct?

Sam Sharp: Yes, that’s true.

Joe Fairless: Okay, cool. So I think it’s important for us to talk about the terms that are typical on that commercial loan, so that when we as investors are underwriting our deals and we plan to eventually do a commercial loan, we’re underwriting to those terms to make sure the deal works, not necessarily the original conventional financing terms, because we’re gonna end with that commercial loan… So what are the typical terms of that commercial loan?

Sam Sharp: These are expanding right now. I have partnerships with other banks that handle the commercial financing. I don’t actually lend commercial financing at all, I only handle residential financing because it’s what I’ve experienced to be my focus and it’s the best way that I can excel at that… But the partnerships I’ve formed with some of the commercial lenders – these will follow a variable type of programs. Some of them actually [unintelligible [00:15:32].23] fixed money that will go through, but as a lot of people may or may not be aware, commercial loans are more about (just as you said) the deal. This is something that’s pretty common that you’ll hear in the investor space – it’s the deal and what the deal looks like… Whereas conventional financing, to that matter, is based off of the personal guarantee and qualifications of an individual; well, commercial loans are based off of the performance of the deal itself.

Of course, looking through this, the idea is that if people are holding these properties long-term, they’re gonna wanna see a certain return on their investment from what they’re looking at, and hopefully they’re getting to a point where they have positive cashflow and they’re looking at something where that deal makes sense. So we look to make sure that our clients are getting involved — basically as they’re building the building blocks towards amassing those ten properties, we’re making sure that they’re in a position where those deals make sense, not only from a residential perspective, but from a commercial perspective, showing that outside of the personal guarantee for the person, that the deal makes sense from an equity position.

Keep in mind, for some people to amass ten properties can take quite some time, so they do see a greater appreciation through that property, but it also can be a matter of what type of deal they got on it when they invested from the beginning.

A lot of people – you’ve probably heard, I’m sure, and you maybe even said – you make money when you buy, not when you sell… So if someone got in a position where they got a good price on a property, there’s appreciation and whatnot, that’s gonna help lead to better improvements. But then further from that will be the cashflow on the property. So we’ll look to make sure that they’re structuring their investments to stay in line from a cashflow or as a return on their investment, as well as appreciation on the property and paying down the equity on that property, so that way when they blanket this together with the commercial investor, the commercial investor can look at all ten properties — and keep in mind, you can even have one of those properties that maybe doesn’t have a lot of equity; maybe it’s not even positive cashflow. But when you look at this as a portfolio and you look at all ten loans, they’re gonna say “Okay, well based on the group value, there’s this amount of equity, there’s this amount of net positive cashflow that’s coming out of it.” So we’ll structure it with them to make sure that that makes sense.

Joe Fairless: And noted that you focus on 1-4 units, residential property, so you don’t do the commercial loans but you partner with groups who do, but just based on your knowledge of the commercial loans, the typical framework for terms – what are they?

Sam Sharp: In the past it’s been more common that they’re gonna be five-year balloons; a lot of them are 20-year amortization 5-year balloons. Just recently I’ve formed some partnerships with some lending institutions that are offering fixed money, and they’re actually even looking to go into 20 and 30-year fixed terms. Interest rates are generally gonna be a little bit higher than what you see — if you go for the long-term fixed, the last structure I looked at was getting into them at sixes, which is still very cheap… But outside of that, a lot of times you’re gonna find money (from what I’ve seen) in the mid 5% range on the 5-year balloon, 20-year amortization… But that landscape is changing, as well… So I dare say too much, because it may be different by the time we even end this podcast.

Joe Fairless: Right, I hear you. What you’ve just mentioned is really helpful just to help set the framework for how we think about the loan package that we will get once we achieve ten properties… Or if we have ten properties now, the type of options that are available to us.

Sam Sharp: I think a better showcase is the attractiveness of the conventional loan package.

Joe Fairless: Sure. [laughs]

Sam Sharp: When you start to look at the normal structure… Basically, when you see that the money is cheaper, it’s like “Okay, well how do we get the cheaper money first?”

Joe Fairless: Oh yeah, absolutely. I love your approach of focusing on how to use the cheap money, which is conventional financing as much as possible. That certainly is key for 1-4 unit investors.

What’s a challenge with a borrower that you could not overcome and you could not work with him/her because of it?

Sam Sharp: Qualifying ratios… Unfortunately, with conventional residential financing we are still using a borrower as a personal guarantor, and we’re going to look at what we call the abilities to repay. We may be in a position where someone just doesn’t make enough money, or the property — combined ratios with how much cash is generated from the cost of the property, as well as that borrower’s income is not enough to qualify. That’s a problem.

Another unfortunate problem that we do run into – the credit requirements, and this is important to note… When you’re dealing with conventional financing, once you get above and you start getting into anywhere between 4 and 6 properties or more, you’re gonna need to have at least a 720 credit score. That’s a huge restriction.

Now, getting those up to first four properties, you still wanna have conventional terms and you still need to have fairly decent credit, so I ran into a lot of clients who, based off their entrepreneurial spirit, they’ve gotten themselves in situations where their credit is just not as good as they’d liked, and that can always a bit of a deal.

Joe Fairless: What is your best real estate investing advice ever?

Sam Sharp: Get started right away. [laughs] I think the best real estate advice — if I had to look at that, I would say surround yourself with like-minded people who have found success in these industries. Never turn away from the opinions that are given freely. I think that even though a lot of us are drawn towards the more successful people and the more successful mindsets, when it comes to any industry, I think that there’s something that you can learn from anyone… Because you’ll never know when someone who has a tremendous success in any of these industries is just getting started… And when you’re having that access and free access to their opinions – that may be very valuable. So keep your ears open, surround yourself with people who are like-minded, and I hate to say it, but don’t judge a book by its cover. Give everyone an opportunity to see what they have to say, and make sure you’re listening.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Sam Sharp: Best ever deal I did was for a client, she was a veteran; it was one of the smallest loans I’ve ever closed, and she broke into tears at the closing table because she was truly that happy that she bought her home. It was a hallmark moment, but I’ve gotta tell you, it almost gets me choked up right now even thinking about it. You could tell she was that happy and that felt amazing.

Joe Fairless: That’s great. What’s a mistake you’ve made on a transaction, either as an investor or in your role as a lender?

Sam Sharp: I can tell you firstly one of the mistakes I made as an investor was purchasing a property and moving on a shortsale assuming that the deal was strong enough and taking the advice without doing the research. It didn’t come out to be sour, but it wasn’t as sweet as I thought, and I think that was the biggest mistake that I ever made, and it was also the best mistake I ever made, because it allowed me to never repeat that.

Joe Fairless: What specific aspect of the deal wasn’t up to par?

Sam Sharp: I could have got a better price. The agent I was working with at the time – I took their word for the value and where it was at, because it was a shortsale and people assume that you’re getting a great deal as a shortsale unless you’re getting it for less than it’s worth.

I got my hands in so many different cookie jars right now that I didn’t take the time until we were going through the process, the shortsale was approved and I got the appraisal, and I got the appraisal, and it appraised at the purchase price. I looked at it, I call the appraiser and said “I know this is for lending purposes, but what’s it really worth?” and he said “Well, that’s about what it’s worth.” I wanted to be that guy who got the shortsale and had $100,000 in equity out of the gate, but that wasn’t the way it works.

Joe Fairless: And shortsales usually aren’t quick, either… You probably waited on that for a little while.

Sam Sharp: Yeah, I was like seven months into it. Maybe that’s not the worst thing I’ve ever done, but it comes to mind.

Joe Fairless: What’s the best ever way you like to give back?

Sam Sharp: I find the best way to give back is trying to share — as I mentioned earlier, I listen to what people have to say, and share my opinion. I like to talk, I love people and I love interacting with people, and the best way that I can give back is just trying to be very open and transparent and to be straightforward and talk to people as much as they wanna listen and treat everyone equally. Don’t treat someone based on what benefit you think you can get from that conversation; treat someone because you’re actually interested in talking to them, and if they’re actually interested in what you have to say, then give them that respect and share with them.

Joe Fairless: On that note, how can the Best Ever listeners get in touch with you and learn more about what you’re doing?

Sam Sharp: You can feel free to call or e-mail me at any time. You can reach me directly at 312-217-4030, or you can feel free to e-mail me at ssharp@rate.com.

Joe Fairless: Sam, thanks again for being on the show. One of the main takeaways I got is you’re focused on how to use cheap money, and cheap money is defined as conventional financing, so really your focus is how do you get your clients in conventional financing as much as possible.

One challenge is once we reach ten properties, then we are no longer able to do that, so the solution that you discussed is rolling into a commercial loan, and now you’re back to zero conventional finance properties, and then you can continue to build from there.

The key is for us to have some foresight and know what type of terms we will get with that commercial loan, that way we can underwrite our residential acquisitions according to the terms of the commercial loan and make sure the numbers work there… Because if they work there, they certainly work with the conventional financing.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Joe was introduced to REO’s after the crash in 2008. He quickly scaled his business to managing over 600 properties. Now his company TANIS, helps investors find deals, do the title work, manage the properties, and anything else you may need.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

List and manage your property all from one platform withRentler. Once listed you can: accept applications, screen tenants, accept payments and receive maintenance tickets all in one place – and all free for landlords. Go totryrentler.com/besteverto get started today

TRANSCRIPTION:

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Joe Mueller. How are you doing, my friend?

Joe Mueller: I am doing fantastic, Joe. How are you?

Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Joe Mueller – he’s been investing for almost 20 years in real estate. He owns and operates TANIS Group Realty since 2003. TANIS – am I saying that right, first off?

Joe Mueller: You are, TANIS.

Joe Fairless: Sweet. TANIS is a Chicago area based real estate brokerage focused on managing and the disposition of bank-owned properties, based in Chicago, Illinois. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Joe Mueller: Yeah, sure. Stop me if you need to. About 20 years ago (give or take) a couple years I fell in love with the concept of living on an island or a beach somewhere through an infomercial and said “I really wanna figure out more about real estate and investing.” Long story short, that kind of led me to the courthouse steps, buying at county court auctions and sheriff sales in my early twenties, and I started flipping houses.

I kind of rode the wave up, got into multifamily prior to the crash, and then consequentially rode that wave back down again. Currently, I’m a licensed broker since 2003 and I of course got that license to assist in my investing (that was the intent), and through my investing at the courthouse steps and sheriff’s sales, I ran into a guy who worked for a bank. He introduced me to the world of REO.

At one point after the crash I think we were managing over 600 properties in the Chicago area, and it’s still something we do today, though I’m kind of multi-focused at this point, and involved in a title company as well, a mortgage company, and we manage properties…

I’d say the current focus for TANIS Group and myself is more of an acquisition and sales business of real estate itself, so a lot of off-market wholesale deals, things like that.

Joe Fairless: Under your company’s umbrella you’ve got a title company, a mortgage company, your manage properties… And do you represent buyers and sellers?

Joe Mueller: We do. Our avatar is the investor client. Typically, we’re seeing somebody either on the “I’m buying my first investment property or my first fix and flip”, all the way to the guys that maybe need help on their fifth, sixth and seventh… But it seems at some point when they kind of cross a hump, maybe at about 10 or 12 properties and they might have gone another direction or got into working with wholesalers or finding off-market assets on their own… But that’s a wide span.

We’ve worked for a couple of the hedge funds that have come through with the city, and helped them buy a couple hundred properties back in 2012, 2013 and 2014… So I would say yes to that answer, for sure.

Joe Fairless: This year where are you gonna make the most amount of your money with your company?

Joe Mueller: Great question. Back to what I said – we’re working on the off-market aspect at this point. We’re printing mail in-house for direct mail, we’ve got bandit sign campaigns our there, we’ve got cars on the road that say “We buy houses” on them… A whole ton of different things, marketing funnels that are going on to acquire more assets, and then depending on where that asset is located, what the amount of work that’s needed is… It could result in a fix and flip for myself and my partners on that side of the business, or it could be kept as a rental, or it could be sold off to another investor… And then wholetailing we do as well, which is a term that I think has gotten some notoriety in the last few years, where you’re basically just buying a property at a great price and throwing it right back on the market, maybe doing zero work at all. That’s what’s generating the most opportunity for financial benefit at this point this year.

Joe Fairless: How do you evaluate the success of these different (as you call it) marketing funnels to find off-market leads?

Joe Mueller: We track everything, basically. I’m still kind of a spreadsheet-based guy; I like to keep things pretty simple. So there are a few software pieces involved as far as the phone systems and figuring out which — so if it’s a probate, for example, versus a pre-foreclosure, versus a high equity “funnel”, I can track all that based on the phone number, essentially, and I can say “Okay, we’ve got 17 calls in the last week from the probates that we’ve been mailing.”

That all goes into a spreadsheet, tracked and evaluated and it does create change, which is a great point to bring up. Right now the way the market is, typically what investors are told when they’re looking to obtain off-market opportunities is – one of them is a high equity list. People that have 50% or more equity in their property, or maybe have a zero balance mortgage. Well, right now the way the market is, most of those are resulting in returned phone calls back to us with “Yeah, I think I’m just gonna throw it on the MLS” or “I already have my property listed”, or they’ve already sold it, if that’s what their goal was.

We’ve actually kind of pushed back on that; I brought that back in-house and not really market it at this point to those types of lists, that high equity aspect, because it just really isn’t any gain on it. Somebody who’s got that much equity in their house just throws it on the MLS and they get the most [unintelligible [00:06:10].18]

Joe Fairless: You mentioned bandit signs, cars on the road, and other things… What are all of the ones that you can think of that you’re doing right now to get off-market leads?

Joe Mueller: It’s a whole global aspect of what you’re doing as a real estate investor… If the opportunity has been out there, I’ve probably done it, and I have two other partners in this side of the business as well, so we’re constantly working on things to keep ourselves ahead of the game… But the bandit sign campaign, we have a couple of billboards up right now on some of the major highways in our area; not expressways, but highways, so it’s a 40k-50k traffic count per day. The cars on the road, like I said…

We’ve dabbled in Google AdWords and the Facebook world and the internet, and not really seen good results personally, so again, we kind of pulled back on those aspects, because we weren’t getting the return.

Joe Fairless: Some of the in-person or (I guess) tangible advertising, versus intangible (the ads online), what has been the most effective marketing approach?

Joe Mueller: The most effective from what we see is the bandit sign, by far. We put out 150 bandit signs per week. We’ve got one guy who’s employed to do that. Essentially, Friday nights at 10 PM he works until about 4 AM, maybe even later… We use a phone app that is out there, and I’ll have to dig that up because I don’t have it in front of me right now… But there’s a phone app that he actually takes a picture with each sign that’s installed, and it puts a GPS pinpoint on the location of that sign… So not only can we track him, we can kind of figure out spots that have a longer staying power, if you will, that don’t get pulled down as quickly, and that’s everything from in the ground, to wooden poles, electric poles, things like that. We actually have a sign sledge to attach them to, so… It’s about the networking as well, it’s about hosting meetups, which I know you do, Joe…

I can’t tell you how much we try to push networking to the investors that either come to my meetup group, or that i meet at other meetup groups or seminars, whatever it is, and how many deals per year — I mean, it may only be a couple, but those couple deals can really be big. We’ve got at least two in the last month that have come just through showing up, which is amazing to me.

So I would say marketing channel-wise, the best thing is the bandit sign in a simple form if somebody is looking to get into wholesaling or off-market property acquisition, as well call it… But really getting yourself out there and shaking hands and getting to know people, talking to guys like you… And you never know, maybe you’ll call me in a week and say “Yeah, I know this guy out of Chicago who’s looking to sell this house, and I don’t know anything about Chicago, so what do you think, Joe?” “Yeah, let me take a look at it.” That’s very common.

Joe Fairless: The two that you’ve gotten the last month, as you said, came through showing up… Now, have those two come from a meetup that you host?

Joe Mueller: Yeah, specifically I was actually asked to speak at a meeting regarding exactly this topic – off-market properties, how do you market for properties, direct mail campaign, stuff like that. My partner Dan Clark and I actually got up and spoke in front of this room; we were up there for about 20 minutes, we were only a part of the evening (we’ll call it), and I’m shaking hands and smiling, kissing babies at the end, and a guy walks up to me and says “I’ve got a friend who’s in a bad spot, and she’s got a three-flat in Chicago she needs to sell. I was wondering if you could help her out.” That turned into a $35,000 check at the end within about a two-week turnaround.

Joe Fairless: Wow, not a bad deal.

Joe Mueller: Just for showing up. And I already said it, and I wanna emphasize it again – there’s a lot of opportunity that can be found just by getting out there and getting to know other people and sharing your story and listening to theirs; you never know what could happen.

Joe Fairless: Yeah, and it’s showing up… It’s also being invited to speak to a group like that, so having the credibility to do that. What group was it? Was it a local meetup? Educate us on the group.

Joe Mueller: Yeah, so that’s a Chicago REA.

Joe Fairless: Okay, so it’s just a Chicago REA invited you to speak, you spoke, and then boom, there you go. About how many people were in the room?

Joe Mueller: Thirty.

Joe Fairless: Thirty or so.

Joe Mueller: Yeah.

Joe Fairless: Why do you think you were invited to speak to that group?

Joe Mueller: I’ve had a relationship with Andrew Holmes, who’s another investor in our area, and he runs a Chicago REA. He’s got satellite meetings once a month around a dozen satellite locations around Chicago. This guy literally three days a week is out there, hosting meetups in different areas around the Chicago metro market… And just through showing up at a meetup I met him a couple years ago, and he asked us to come up and speak, which I’ve done more than once.

Joe Fairless: Episode 933 is when I interviewed Andrew, so Best Ever listeners, you can check out that interview. So you are working on these off-market deals, and as you said, that’s the leading way that you’ll be making money in the business. You said you’ve got a title company, a mortgage company, and you manage properties. Out of 100%, what percent of each of those three do you think income can be attributed to?

Joe Mueller: Probably almost in the order you brought it up. The real estate brokerage itself, aside from any type of off-market discussion we had earlier, the real estate brokerage, which is working with investors, listing fix and flips for other investors, things like that, finding properties – that’s probably the biggest contingent of those aspects of my business. Then consequentially to that would be the title company, and then I’m also a partner in a mortgage company.

Being on this side of the business, one thing you learn – and I’m sure you’ve experienced this as well, Joe – is when I would refer a mortgage broker to an investor or vice-versa, I’d say “Hey, John Smith, give my mortgage guy a call. He’ll you out to buy that 4-unit property”, but there’s really no accountability between my word and then what that mortgage broker or that mortgage person does as a result. I mean, I’ve worked with him in the past, he closed a couple deals, he’s a great guy… And what I’d feel like is it was my name on the line and I’m gonna be referring somebody to another partner in the industry that there’s gotta be more accountability. The mortgage brokers, at least in Chicago, they’re a dime a dozen, and they’re constantly changing… They get overwhelmed and they don’t have an assistant, and the next thing you know they don’t call somebody back for two weeks.

As an investor, as you know, a lot of these deals are based off timing, and you can’t screw around for two weeks when you’re waiting to get a loan close or you’re waiting for an appraisal to get ordered… So my solution to that was buy into a mortgage company, and that way the accountability is always gonna be there. Same thing with the title side. Property management – that’s just another contingent of what we do here at the brokerage, because I have my own portfolio, and it just made sense, since I’ve got the systems in place, that I can offer it to other people.

We’re a very simple property management company with fees, and stuff; I charge $100/month per asset that I manage, and we basically take care of everything. Any type of maintenance or capital expenditure gets passed on to the owner. I like to keep things simple.

Joe Fairless: How many properties do you manage right now?

Joe Mueller: Including the portfolio I hold myself, we’re somewhere in the 65-70 range.

Joe Fairless: Are you currently buying right now for your own portfolio? What’s the last property you bought?

Joe Mueller: The last property that I’m keeping in the portfolio was a 3-bedroom 1-bath ranch, single-family, that I picked up for 71k net, so I had to pay the real estate taxes; I didn’t get prorated taxes at closing, which is another $2,500 or so.

Joe Mueller: Perfect tenants, husband and wife, no kids, great incomes, credit scores in the high 700’s. They wanted to move in on May 31st; they were actually like “We need to move in early. Everything’s great.” I talked to their last landlord who was selling their house, everything checked out… And then the lease gets presented to them in DocuSign, and they just don’t respond for a day. Now we’re following up with them and they’re like “Yeah, we’re still thinking about it. We had to move out of our old place, put everything into storage, we’re staying at a hotel right now.” I’m like, “Okay, something doesn’t make sense.”

Joe Fairless: Yeah…

Joe Mueller: So we’re back on the market with that one… But $1,400/month, to answer your question.

Joe Fairless: How did you find it?

Joe Mueller: That was through the off-market channels. It was actually a yellow letter to an absentee landlord. Actually, it was a vacant house that the neighbor owned, but essentially an absentee list, so it wasn’t being rented, but the family bought the property with the intent to move their in-laws in, who were deteriorating in health. Unfortunately the health deteriorated too quickly, so they never had the opportunity to fix it up or put their in-laws in there, so they ended up selling it to me.

Joe Fairless: When you look back at your multifamily investments prior to the crash, and as you said at the beginning of our conversation, you rode that wave back down again – what would you do differently now if presented a similar situation?

Joe Mueller: You know what, I think at that point in my life when I was in my late twenties I probably bit off more than I could chew; I went from essentially a handful of single-family, one commercial building, and I escalated up into (I think I had) 47 apartment units within about two years, and I overleveraged. I basically acquired, fixed up and cashed out and pulled out a couple hundred thousand in equity out of these two buildings which equated to 47 units, and then when the crash happened, they were no longer worth what my loan values were… And it was a long battle to get that situation corrected and avoid foreclosure and avoid bankruptcy and things like that.

In the end, one of them I sold basically for what I owed on it, and the other one I had to come to the table and actually pay the buyer money to make that loan go away… But it took a couple years.

That’s one thing I’d like to offer to the listeners – when you’re considering using leverage, just use it carefully, and don’t pull out 95% of your property’s value, even if they tell you you can, because if something changes, you could be stuck. In the commercial baking world, as I’m sure you know, Joe, with your experience – they have the right to basically pull that loan, even if it’s performing.

Joe Fairless: Is that what happened, it was performing and then they decided to pull it?

Joe Mueller: Absolutely. This was all 2006-2007 is when I ramped up to that number of units and had those loans put in place with refinances and pulled out that cash. A few years later, obviously, the crash had happened, and even though I’d made every payment, never been late, and the properties were performing, they made money, I got a phone call one day from some type of manager at the bank and they said “Yeah, we’re no longer gonna be servicing these types of loans here at our bank, so your note’s due.” I was like, “Um, what?”

Back then, in 2010-2012, getting funding for those types of properties wasn’t easy. In the end, I ended up saving what I wanted to save and kept an office building that I still occupy as my office, but the apartment buildings I ended up having to sell. One of them I sold through the property manager that was actually managing the property at the time.

Joe Fairless: Yeah, the property manager was like “This is a great investment! Yeah, I’ll definitely buy it. It’s cash-flowing, and everything… It just won’t work with that lender.” How long did the lender give you in order to pay off the loan?

Joe Mueller: It took over a year. I don’t remember the exact timeline. It was probably somewhere around 18 months. But they didn’t give me any time; it was like a 90-day turnaround. “Your note’s gonna be due in three months, essentially.”

Through that process I continued to make payments, and they kind of started to get a little more aggressive with their desire for that money; they sent me the loss mitigation, so I was never technically defaulted or in foreclosure. That’s their process – mitigating that bad money (as they saw it, I guess we’ll call it) and finding a bank to refinance at that particular time, at least for me, was not possible, so I ended up selling… Which I’m still happy with that choice today, as a matter of fact. It all worked out.

Joe Fairless: And you always go back to that lender because they’re loyal to you, so you’ll be loyal to them forever, right?

Joe Mueller: [laughs] Oh, man… I pulled every account out of that bank the day after that call came in. Actually, I had an account with $1,000 in it – I think it was an escrow account for something – and they froze that $1,000, which they still have.

Joe Fairless: Ugh…

Joe Mueller: So no, I will never bank there again, and I’m not gonna mention any names, but it was a major national bank…

Joe Fairless: Oh, it wasn’t a local portfolio community bank or a credit union?

Joe Mueller: No, that’s something that I had to learn, right? And when I say that, I mean as an investor, create relationships with your local community banks, as Joe just said. That’s where you’re gonna find the best types of opportunities, in my opinion, and then best types of future relationships where they may even — I’m not gonna say bend the rules like they’re doing anything bad, but they’ll change some of their lending guidelines if they see an opportunity.

I’ll give you an example – I’ve banked with another smaller local bank since, and they had a one-year seasoning rule on any rentals that I was buying. Basically, I’ll give you the quick rundown – if I acquired that house that I brought up earlier, that 3-bedroom 1-bath rented for $1,400, typically I’d have to wait 12 months before I could refinance a cash-out, and I do that because I’m borrowing private money from private investors that are giving me money at 10%, we’ll say… And I wanna give them an opportunity, so that private lender makes some money along with working with me, and then I wanna refinance out, so I’ll do 13-month notes to accommodate that refinance process.

Well, we sat down and kind of did (we’ll call it) an annual review, and they have a new manager over at this bank that I’m utilizing, and the guy’s head exploded when he saw the amount of properties that we had and the amount of transactions we were doing. He’s like “Why don’t you put all of your loans through us?” and I said “Well, because have to wait a year to season these properties, when I can go to ABC commercial bank down the street (another smaller bank) that will do it in three months, but they’re limited on the number of loans I can have with them.”

The manager was like “No, I’ve gotta talk to the board. We’re gonna fix this right now”, and lo and behold, two weeks later I have another meeting and they’re like “We’ll give you no seasoning loans all day long. You buy a property, we’ll refinance the next day.” I’m like, “Fantastic”, because I really like working with that particular bank, and it’s all about that relationship, building those relationships.

The only other thing I wanna add to that, and it kind of all falls back into that networking experience – I know when I started out I was like the lone wolf… Like, I was gonna fix and flip everything, and I was gonna be the guy, and I was gonna buy all these houses, and I held everything very close to the vest… And it took me a long time to realize and maturity level to grow into was that was the complete wrong way to invest in real estate and deal with other investors, for example… Being an open book and believing the abundance mentality has changed things tenfold for me.

The reason why I used that crappy bank in the beginning that ended up calling my notes due, but because I had great credit and I had good income and I went to one of the biggest banks in the country, thinking “Oh, this has gotta be the best opportunity” – well that was way wrong. But if I would have had friends in the business or if I would have networked more, if I would have opened up to other people and shared my experiences and offered something to them, I’m sure I would have met a better bank or a better opportunity and I never would have been put in that position.

So just a little piece of advice for the listeners out there is when you’re dealing with other people, tell them your story; be honest, tell them the truth. Tell them how you failed. Every investor fails. At some point, something goes wrong, whether it’s my story about the multifamilies, or a fix and flip that doesn’t work out or you lose money on it… Because people see that and they see that you’re an open and honest person, and then they go “Yeah, he seems like a pretty cool guy. I know somebody that might be able to help him with this.” I can’t believe how many opportunities come my way just by being open and doing stuff like this, being on a podcast, or hosting my own, hosting the meetup here at my office… It’s tenfold the results that come back to you, the benefit.

Joe Fairless: Based on your experience, we’re gonna extract one more piece of advice, because I haven’t asked the money question… What is your best real estate investing advice ever?

Joe Mueller: This is a simple one… Hustle, hustle and hustle. I get that question, “How do you do this? How do you have this title company, how do you broker REO, how did you sell 400 houses in 2013? It’s hustle. You get up every day, you work hard, you play hard too, schedule your life however you can with your family that makes you comfortable or satisfies your wife and kids, but you keep hustling and you will succeed. Don’t give up.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Joe Mueller: I wasn’t prepared, but sure…

Joe Fairless: Good, I don’t want you to be prepared. I want some real answers, baby. First though, a quick word from our Best Ever partners.

Break:[00:23:09].06] to [00:23:50].27]

Joe Fairless: Okay, best ever book you’ve read?

Joe Mueller: Think and Grow Rich.

Joe Fairless: Best Ever deal you’ve done?

Joe Mueller: I’m in the middle of probably the best deal ever right now. I can talk about it if you want.

Joe Fairless: What about a deal you’ve already completed, that wasn’t your first and wasn’t your most recent? Something in between.

Joe Mueller: Sure. A couple years back I went under contract to buy a riverfront property in the Chicago area for 125k, and I found another investor that was interested in buying it for 150k… So it seems like a big win, 25k profit potentially, and in that process the end investor started poking around with the city and asking questions about the zoning and things like that, because he was potentially gonna knock this property down… And the city started to pay attention and saw that the property had been dilapidated, and they started fining the owner, and then the owner said “You know what, I want this thing gone. I wanna close tomorrow. I’ll sell it to you for 25k.” So yeah, that was a great deal.

Joe Fairless: Absolutely. What’s a mistake that you’ve made on a transaction that we haven’t discussed?

Joe Mueller: I would say underestimating the cost of labor and materials, a.k.a. working with contractors, for sure. I’ve gone over 25k over budget, and I kind of think of myself as the guy who really knows the numbers well, so… Always build in a buffer zone, at least 10%, because something is always gonna come up when you’re working on a property or an apartment building. Whatever it is, always build in some extra wiggle room there. You’re never gonna be 100% accurate.

Joe Fairless: Best ever way you like to give back?

Joe Mueller: That would definitely be the meetup/networking with other investors. I don’t see myself as a teacher or as an instructor, but I do share my experience with anyone and everyone who will listen, and again, that helps other people grow and improve their own personal lives, and I find that rewarding.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Joe Mueller: The best way to get a hold of me is actually e-mail, Joe@TanisGroupLLC.com. That’s the easiest way.

Joe Fairless: And you’ve got a podcast, The Investor Empowerment Series Radio Show. Best Ever listeners, you can check that out, too.

Joe, thanks for being on the show. Thanks for talking about where you came from, what you’re doing now, and some tactical advice that will be helpful for myself and the Best Ever listeners. One, finding off-market deals – number one way, clearly, for you you said is bandit signs; you’ve talked about how to approach that… Perhaps if a Best Ever listener is curious about that phone app you were talking about, they can reach out to you and then you can give them that information – first off, is that okay?

Joe Mueller: Simple Crew is the phone app.

Joe Fairless: Simple Crew, sweet.

Joe Mueller: Simple Crew, and it was truly my privilege, Joe. Thank you for inviting me to be on the show.

Joe Fairless: That and the hustle mentality of connecting with people, and the portfolio lenders versus a national bank, the importance of the relationships there… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Marc is the Co-founder and CEO of a company that created a software to help automate the underwriting process. Enodo will save you time and money in your underwriting process by taking out a lot of the small, tedious tasks that right now, a human does. Hear exactly how his company may be able to help you.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

List and manage your property all from one platform withRentler. Once listed you can: accept applications, screen tenants, accept payments and receive maintenance tickets all in one place – and all free for landlords. Go totryrentler.com/besteverto get started today!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Marc Rutzen. How are you doing, Marc?

Marc Rutzen: Hey, I’m doing great.

Joe Fairless: I’m glad to hear that, and welcome to the show. Marc is the co-founder and CEO of Enodo, which is an automated underwriting platform for multifamily real estate. It helps users analyze more deals in less time and make better investment decisions, backed by data science.

Based in Chicago, Illinois. You can learn more about his company after this show at his website, which is EnodoINC.com. With that being said, Marc, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Marc Rutzen: Sure. My background is actually in real estate. I got my MSRED in 2011 from Columbia. I went into a really bad market for development at the time. In 2011 there wasn’t much going on, but I did get to work on a few projects to masterplan community developments, federally qualified health centers… I worked in brokerage, in real estate consulting for five years and saw how inefficient the real estate industry is, and during that time, I learned some tech, learned frontend development and learned how to manage a technology team.

I did a few consulting projects on the tech side, a few mobile apps we developed, and ultimately came to the process of creating Enodo, because the way we analyze deals today is completely ineffective, and it requires a lot of money on analysts who then pull data from that software and then analyze it themselves, and then you still pay an appraiser to try to make sense out of it completely objectively on top of that analysis you do. It’s very costly, very labor-intensive, and it produces poor results at the end of the day. We saw that in the results of Enodo that it solved those problems.

Joe Fairless: Where does the labor go in a typical underwriting process, that disappears in what you provide?

Marc Rutzen: If you’ve ever dealt with a Yardi rent roll or RealPage, with all the cost codes broken out, or say you receive a T12 for a property that you’re considering investing in, and you need to map their line items to your chart of accounts – well, there’s one time savings right there. You just upload your PDF, rent roll and T12, and we instantly parse it and map it to your chart of accounts, so it’s underwritten the say way you would underwrite a deal, except you don’t have to do any of the PDF to Excel converter, and copying and pasting, and parsing, and adding and averaging and all that. So there’s one.

Two is we tell you what your statistically most relevant comps are, and do the comp survey in the platform almost instantly. So we pull in their rents from their website, we tell you when we got the data, where we got the data, and help you compare on an apples to apples basis your property to your competitor market, very quickly in the platform… It’s almost instantaneous.

Then finally we actually benchmark operating expenses as well and rent as well, so we tell you what you should be able to generate in terms of rent based on everything that’s going on in the market, your competition, your demographic, demand drivers – we take that into account for your rents. Then for your op-ex, we actually benchmark you among similar properties in terms of your total number of units and all that, and tell you if you’re under or over-performing in each individual line item.

Joe Fairless: Wow, that is impressive. I’m looking forward to digging into the assumptions in each of these, because I think that’s probably gonna be the key to just learn more about this. The first thing you mentioned – I don’t know if there are any assumptions, because it’s just a helpful tool where converting PDF into Excel, and then copying/pasting and making sure the line items line up… That’s a process that my team does, and it sucks, so that certainly would be helpful there, so there’s really nothing else to say about that, I don’t think.

But as far as the statistically relevant rents, in order to determine what the rent could be, I imagine you’re gonna have to know what we plan on doing to the property, because if I’m doing a $500 upgrade versus a $20,000/unit upgrade, that’s gonna influence what type of comps you provide… So how do you reconcile that?

Marc Rutzen: Absolutely. One of the things we do that nobody else does is we break down the individual contribution of each different amenity to the rent you can generate. So we tell you, if you buy a property and it’s got some old lemonade countertops, it’s got a dilapidated old refrigerator, it has no real common area amenities… We could tell you that if you install granite countertops, you’re gonna get $25/unit a month. If you put the stainless steel appliances in, you’re gonna get $12. If you put in a rooftop deck for the residents to use, you’re gonna get $13. We actually go to that level and quantify it.

So you’re talking about it in terms of dollars that you’re gonna invest, but the residents think about it in terms of the features that they’re gonna use, so there’s not always a direct correlation between spending money and earning returns, and what we try to do is tell you “If you were to do this, this and this”, what should the return be based on everyone else that has those amenities in the market, and their comparability to your property.

Joe Fairless: That’s really interesting. So how do you know what each item will achieve on a premium?

Marc Rutzen: This is the core of our algorithm, but simply stated, what we do is we look at the market that you’re located in down to the census tract level, we look at the types of people and the types of properties… So the median incomes, the population, the percent college educated – all that. All the demographic data that you would collect if you were analyzing a market.

Then we look at the distribution of the different unit types, the rents that they’re generating in that particular market, and we reach a demand and supply equilibrium.

Then we look at each adjacent census tract and we kind of expand out. If it’s similar in terms of the people, the supply of buildings and the demand from the people, we gather that market and we add it to what we call the market cluster. Now, once we’ve built a market that has enough data to predict, it’s basically souped up regression from there. We hold everything else counted but the single amenity that we’re trying to analyze, and if the only thing different between group of properties A and group of properties B is that one has a pool and one has not, we isolate the impact of that amenity, and then we go to the next one, and the next one, and the next one, so we quantify the impact of each different amenity statistically, and we give you variance around that, too… So it’s like $13 plus or minus $3.

Joe Fairless: That’s fascinating. When did you launch?

Marc Rutzen: We’ve launched May of 2016, [unintelligible [00:08:11].06] and we’ve raised 2.1 million during that time.

Joe Fairless: Congrats on that. I understand why you have raised the money that you’ve raised. Help me understand – I know you’re not a lawyer, but web scraping – is that legal?

Marc Rutzen: Some sites allow it, some don’t. We go to the ones that are okay with it, and one of the things that we do that is different from anyone else — because all the companies out there are web scraping, or they’ll call it data mining to some extent… What we do to get around that is when we go to the individual property websites – there’s about 40,000 nationwide – and we sit on the actual property website… So it’s not like there are thousands and thousands of people going to a single property website, so for them it doesn’t matter so much that we’re able to collect the data if it becomes available; it’s straight to the source, and it’s minimally disruptive.

Two is we get the data from the users. When they upload from their property management software, they can upload a whole portfolio in one fell swoop, and integrate with Yardi, RealPage – and we’re building Entrata as well – and then have all their properties on the platform to analyze; that’s a big data source.

Then the other is just from the user when they upload rent rolls and T12’s. [unintelligible [00:09:33].21] nothing that you would not consider fair game goes into the platform for anyone else to see, but we could train on all of the data and we can display the market rent, the advertised rent on their rent rolls. When we do that, we’re able to get the freshest possible data straight from the source. That’s kind of how we can get around the issue of having to get too much of the data from web scraping.

Joe Fairless: How have you evolved the features from when you started in 2016 to today?

Marc Rutzen: The biggest thing is the score… So in the beginning, we started with this idea that there’s a composite score that can tell you the investment potential of a property. And we still do wanna have that, that kind of sums up the potential of the market, the potential of the property based on other properties in the market, the long-term growth potential… So that was Enodo’s score at that point, and what we found was that our users told us “No, I really wanna know how should my rent look compared to the competition” or “How should my operating expenses look? Is this a deal that I can make money on or not?”

When you build that trust in the underwriting, you become a tool that people go to to underwrite deals, and they understand the predictions, they trust the results, and then you can distill that into a composite score, and people will trust the score. Otherwise, [unintelligible [00:11:01].16] to say “Buy this property because it’s a 99”, without any other information on it.

So that’s the biggest thing that I would say — we start now with the underwriting and we work towards the score, versus vice-versa.

Joe Fairless: On the operating expenses benchmarks, how do you know what other properties are operating at?

Marc Rutzen: Our users, as they’re uploading – we’re getting more than 100 T12’s. And for some context, we released the T12 parsing not even two months ago, and now on a monthly basis we’re getting more than 100 T12 uploaded, so that’s helping us benchmark at a very granular level, because it’s actual deals, actually uploaded by users.

In addition to that though, we’ll look at the NAA and [unintelligible [00:11:49].12] benchmarks by market, and use that to inform our algorithm so that we’re able to adjust for regional differences. We may not have universal coverage from a few hundred uploaded T12’s, but we’ll get very granular in certain markets and then be able to extrapolate that to other markets because of the benchmark data that’s available nationally from [unintelligible [00:12:09].09]

Joe Fairless: What are some regional differences in operating expenses that you’ve seen?

Marc Rutzen: Florida insurance is 3 to 4 times as high as my hometown of Chicago. On the flipside, Chicago taxes are 3 to 4 times higher than everyone else a lot of the time. Chicago is notorious for that.

Joe Fairless: Yes…

Marc Rutzen: We see stuff like R&M, and salaries of the personnel being a lot cheaper in the South and a lot higher in cities like New York… In larger cities, I would say, because the labor costs are higher.

Joe Fairless: And when you say R&M, is that renovations and maintenance?

Marc Rutzen: Repairs and maintenance. One of the things we see that’s really unique is people call everything something slightly different everywhere you go. There’s no cohesive way to underwrite a deal. Everyone’s got their own way of doing it, and a part of what we wanna bring is that standardization, that this is called “Repair and maintenance”, or “Repairs and maintenance”; this is the one we’re gonna use, and everyone is gonna use that. We get some pushbacks on that… So we’re trying to build it in such a way that everyone gets exactly the way they wanna analyze, but also has a standarded benchmark, too.

Joe Fairless: On that note, how do you take a PDF that’s calling it Repairs and Maintenance, but then your spreadsheet or the person’s spreadsheet says “Turnover costs” or “Cap-ex”, or whatever? How do you do that?

Marc Rutzen: The system that we’ve put in place – and this is with great internal debate that we had about this, but I think it’s the right way to do it – is that the user can designate their chart of accounts, their specific way that they wanna analyze line items in our software. They can go into the admin section, they say “I want R&M to be included, I want Salaries and Personnel, I want turnover separated from R&M, I want landscaping, security etc” and you can put all these different line items exactly the way you want them represented.

Then when you upload a T12, what it will ask you to do is categorize the first, second, third times, categorize for that T12 where do you wanna drop those line items. But you do it two or three times, and then the next one you upload it picks up most of the line items and puts them in the bucket you want right away. The power of machine learning. You do it a few more, it catches almost 100% of everything and jumps it into the appropriate bucket.

Now, there will be some instances where gas or utilities or something are called Reimbursements and Expenses, and in those cases it’s gonna be hard for the machine to pick it up, because it’s based on the text; we’re building in more robust infrastructure to do that based on the value AND the text, so some of that will be handled in the software, but for the most part, when you upload a T12, if you have trained it by uploading a few prior T12’s, it’s gonna do all the categorization and mapping for you instantaneously.

Joe Fairless: And how much does it cost to have this program?

Marc Rutzen: Our base subscription price is $500/user/month. That’s for everything on the platform – that’s for the incremental impact of amenities, it’s for the comps and the instant rent surveys from the comps, it’s for the operating expense values, and of course, the T12 and rent roll parsing with that.

If you wanna do slightly less, we’re building tiers to cater to people that want a portion of that functionality, and we’re happy to have the discussion because we can turn off certain aspects of the interface if you don’t use it. As you see from the website though, a lot of our customers have been bigger national companies, and they do want the whole thing.

So we’re just now starting to figure out what those pricing tiers look like for smaller users, but $500/user/month, and then every user after that is only $250/user/month.

Joe Fairless: Who is this ideal for, and who isn’t it ideal for?

Marc Rutzen: Well, it kind of shapes out in our customer distribution. I think it’s ideal for obviously value-add investors; that makes a ton of sense. If you’re gonna get spend some capital, you wanna know what you’re gonna get on it. Developers and lenders have really shaken out to be two of the biggest customer groups though.

So we’ve got national developers — there’s a lot of uncertainty when you do a new development, because you don’t know how it’s gonna perform. For an existing property you can look at T12’s, but for the development there is not T12, there is no in-place rent to speak of. So developers like it because they can [unintelligible [00:16:44].01] a hypothetical property, put in the unit mix, put in amenities, and instantly see how they would perform in terms of rent, what their comps would be, and what their stabilized op-ex would be.

Lenders like it for the volume. You can do the same analysis that you do on our interface with our API without ever touching the interface; just query our algorithms individually… And lenders like to run many loan applications through it and see how should these be performing in terms of rents, and how should they be performing in terms of occupancy, [unintelligible [00:17:18].01] and then each individual op-ex line item, is it a good deal or not? For a lender, you can do that a lot more quickly with Enodo than manually.

Joe Fairless: And who isn’t it ideal for?

Marc Rutzen: I’d say property managers we have not had the best traction with; asset managers yes, because they can quantify individual pricing of amenities, and it helps them look at managing the portfolio a little bit more efficiently… But property managers – there’s a lot of products out there to help property managers, and sometimes on occasion they can be reluctant to learn a new software product with all the stuff they already have to contend with… So that’s what we’re run into, that’s kind of been the group that is least receptive.

Joe Fairless: What is your best real estate investing advice ever?

Marc Rutzen: Well, obviously, the first one would be to use Enodo, right? But my advice – and I’ve said this before – I think the way you build a product and the way you build a real estate investment company are similar to an extent; you start small, you build something or buy something that has strong revenue potential, and you try to make a good first couple of deals. Then you roll that into the next few – in my case – features for the product, roll that revenue into new features, new team members to build new features, and in the case of an investor, roll it into new properties that are larger and larger in terms of unit count, square footage, and all that… And then diversify into different verticals – in my case, catering to different people, and in the real estate industry case, different markets.

Eventually, you build from that strong base to go into different markets, and if you do it that way instead of trying to acquire way too much up front on the property side, or build way too much up front on the product side, you’ll have the incremental revenue there, the customer base to weather the downturns, and to keep building and to keep advancing… Versus if you did it all upfront, you either succeed big or fail big. A lot of times it ends up being that you fail big, because you didn’t really build up a strong revenue stream first.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Marc Rutzen: Sure.

Joe Fairless: Alright, then let’s do it. First, a quick word from our Best Ever partners.

Break:[00:19:36].21] to [00:20:12].25]

Joe Fairless: What’s the best ever book you’ve read?

Marc Rutzen: I would say the lean startup is probably the best for me… It’s a roadmap to exactly how I’m running the company.

Joe Fairless: Best ever deal you’ve done real estate-wise?

Marc Rutzen: Probably a two-flat renovation… I’m not a huge real estate investor by any means, but I got it for very cheap from Fannie Mae in 2010, renovated it, and was able to lease it for pretty good rates, so I was happy with that.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Marc Rutzen: I’m thinking about my development deals… One time we started negotiating with a landowner a little bit too early and revealed a little bit too much before we had the turnkey development that we wanted to build for, before we had the customer fully secured, and we ended up not getting as good of a deal as we thought, because they found out about that customer and then upped the price… So we lost some value there. That’s probably the biggest mistake I’ve made.

Joe Fairless: Best ever way you like to give back?

Marc Rutzen: To give back, I like to do a lot of presentations in universities about my career path, and how I went from a real estate person to a product developer and CEO of a technology company… Because it’s an interesting journey, and I think it helps young people figure out more certainly what they wanna do with their career.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing and your company?

Marc Rutzen: I would say just check out this podcast first of all, and then EnodoInc.com. You can watch our explainer video, or schedule a demo and I’d be happy to walk you through the software.

Joe Fairless: Mark, thank you so much for being on the show and congratulations on the launch of this business… It certainly serves a need for groups like ours, and it is interesting to hear your thought process and the data behind each of these. It will be helpful for others as well, I’m sure, so thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Jorge owned over 4000 apartment units before losing it all. He wrote about that experience in his book, Burn Zones. Now Jorge helps people stay in their homes when they can’t afford their mortgages anymore through loan modifications. Jorge also helps other investors do the same thing as him. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

List and manage your property all from one platform withRentler. Once listed you can: accept applications, screen tenants, accept payments and receive maintenance tickets all in one place – and all free for landlords. Go totryrentler.com/besteverto get started today!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Jorge Newberry. How are you doing, Jorge?

Jorge Newberry: Hey. Good, Joe. Thanks for having me on.

Joe Fairless: My pleasure, nice to catch up with you again. I saw you in Denver at our conference a couple months ago(ish), and really enjoyed meeting you. I feel like I’d met you in person before, but if not, then I really enjoyed meeting you in person… But the reason why I felt that is because I’ve read your book, as I’ve told you before, and other people who I come across in life on a – I say this as much as I can, it is a must read for apartment investors; real estate investors in general, but really apartment investors, because it talks about pros and cons of how things can go up and things can go down with apartment investing in particular. The book is called Burn Zones, so I recommend reading that, Best Ever listeners.

Then also what Jorge does now – he is the founder of American Homeowner Preservation. American Homeowner Preservation utilizes regulation A+ to crowdfund the purchase of non-performing mortgages from lenders at big discounts, and also help homeowners stay in their homes.

Jorge has also recently been doing a program where he’s helping others – he’s training people how to do what they do to buy non-performing mortgages, so we’re gonna talk about that, and that is the focus of our conversation today… It is if you are curious about how to do what his company does for yourself, then you came to the right spot.
If you wanna hear his best ever advice, go to episode 1126, titled “Bad Things Happen. Jorge Newberry Helps Families Stay in Their Homes When They Do”, so episode 1126, you can hear more about Jorge. With that being said, Jorge, do you wanna just briefly give a background so the Best Ever listeners have some context? Then we’ll dive into the training.

Jorge Newberry: Absolutely. You touched on it, but I’ll give you the short story. About 15 years ago I owned about 4,000 apartments across the country, had a net worth in the tens of millions, and an ice storm hit my biggest holding and triggered this extraordinary sequence of events where I lost everything and ended up 26 million dollars in debt. That was more or less 2005-2006.

I was looking for a means to rebuild, and then I started hearing about the rumblings of the housing crisis and the mortgage crisis, and I thought hey, I just went through this ordeal and I survived, and now I see all these other families (millions of families in America) homeowners who are facing the same financial collapse that I did… And how can I help them? How can I use my experiences to devise strategies to buy their debt from banks and hedge funds at big discounts, and then we work that debt if they wanna stay in their home, but at much more affordable payments, reduce their delinquency… And that’s how AHP started. We started in 2008, so we’re almost 10 years old, and it’s kind of evolved over the years into an investment fund which is now people can invest online $100 and support the mission.

We buy a lot of loans. We bought more than 2,500 loans last year, over 100 million dollars in debt, at huge discounts, and that’s what we continue to do. We see there’s a big opportunity, and once the market turns the other direction, we’ll see it as an even greater opportunity.

Joe Fairless: Because the worse the market is – to put it crassly – the better your business is.

Jorge Newberry: Yeah, and it’s not like we hope people get in trouble with their mortgage, it’s just a by-product of a downturn in the market, and I guess the way to look at it is that we hope that families will need assistance at that point, and we’ll be able to assist them. And literally, when we work a mortgage, it’s not “Hey, we’re cutting your payment by a few bucks.” We can cut payments in half, we can forgive tens of thousands of dollars in delinquent payments or principal if we want.

We buy these at such discounts we have huge flexibility in terms of what we can do to make it. What you really wanna do is provide a solution so that the homeowner is saying “Hey, this is a great deal. I wanna pay you each month, because my payment is half of what I used to pay”, and you’re delivering a financial transformation, which also ends up yielding you a good return, because these things are sold at such great discounts often times.

Joe Fairless: And do you take accreditted and non-accreditted investors?

Joe Fairless: And what type of returns have you historically achieved?

Jorge Newberry: We pay our first 12% to investors, and historically we’ve been paying that. And the actual returns, what do we generate – we’ve been generating 20% to 30%; our audit financials for 2016 we were I think 39.7%, so very high returns. It’s gonna drop down; the first year is usually the highest, but it’s still gonna be in the 20s and 30s.

Joe Fairless: And you said first 12% to investors, so is that 12% to investors and then the difference to your company, or is it split? Is there some sort of other performance hurdle?

Jorge Newberry: No, the difference goes to our company. We basically get everything over the 12%, but we don’t get it right away. What we do is in the first years of the fund we reinvest any money that’s over the 12%. That just gets reinvested in new mortgages, so if there’s a downturn, if for whatever reason our returns get low for a moment, then we haven’t just distributed to ourselves; it just stays in the fund and there’s more and more assets in the fund.

The goal is at the end of five years all investors are paid back both their investment capital and their 12% return, and whatever is left is ours. I know the number from mid-2017, it’s accumulated profits… So in our first year of operation in this particular fund we generated around a million and a half in accumulated profits; so that’s profit over and above what we paid to investors, so that money was utilized to repurchase mortgages, and eventually if we were to liquidate the fund today, then that money would go to us.

Joe Fairless: And is that 12% annualized return?

Jorge Newberry: It’s 12% annual return and we distributed it at 1%/month.

Joe Fairless: Sweet. Alright. So now let’s talk about training people – and by people, I mean me and everyone listening, the Best Ever listenters that are listening – how we can buy a non-performing mortgage at the discount where we’re able to then cut the mortgage payment in half to the owner?

Jorge Newberry: I’m gonna tell you two stories which will probably help illustrate this business. The first one is how difficult it is to get into this business. If anybody out there has tried and has not been successful, I sympathize, because when we started… You don’t just call CitiBank and say “Hey, get me to your department that sells your non-performing mortgages.” They’re just like, “Hey, we don’t have that department.” So I could not figure it out, and finally what I did was I read a news story about [unintelligible [00:08:01].13] They were purchased by Bank of America and they laid off the CEO… So I said “Well, that guy probably knows the guy who I need to talk to.” So I reached out to him on LinkedIn, and he accepted my connection, and I sent him a message saying “Hey, can you help introduce me to the people that can sell me defaulted mortgages?” Thankfully, he replied and he made me a proposal, I should say.

Again, he was unemployed at the time, so he said “Wire me $4,000 and then fly to New York and I’ll spend a day with you and I’ll take you to all the sellers I know.” At first I was thinking “This sounds kind of weird”, but he was a real guy; I’d read news stories about him, so I said “Let me do it.” I sent the $4,000, and I flew to New York…

Joe Fairless: Any paperwork?

Jorge Newberry: No paperwork, all LinkedIn messages. That was the extent of our paperwork. I guess it was pretty — well, it was $4,000… So what we did was we ended up flying to New York and he took me around to Bank of America, he took me around to all these different lenders, and it ended up being a highly productive day. We went to a number of big hedge funds, and again, Bank of America, and a month later we were buying loans.

At that point in the market – it was a point where the banks and hedge funds would sell to just about anybody who was willing to buy, because there was such an oversupply of loans.

Now, fast-forward to today, now it’s tough for us to buy from some of those same banks that were willing to sell to us in our first few months. The reason is there’s a lot more competition; just like in the real estate market and the note market, there’s a huge amount of competition for these mortgages, so now they won’t sell them a few hundred thousands or a million at a time, they’re selling them at a hundred million dollar pools, so when we call and say “Hey, we have 10 million bucks or 5 million bucks”, they’re like “I can’t help you.”

But anyways, that was our start. But that is not a scalable, a repeatable start, so what I wanna do is provide that. The other part of your question was “How do these work in terms of buying these, and selling, and then discounts, and providing these extraordinary solutions to families?” I’ll give you an example – we bought a loan… And this is a very common situation. We bought a loan on which the family had refinanced in 2008. Obviously, not a great time to refinance. The property at that point was appraised at $200,000, and they refinanced at $164,000. This is in Maywood, which is just outside of Chicago, and shortly after the crisis in 2009-2010, the breadwinner in the family was laid off from his 20-year job with Culligan water, basically delivering water to offices; he was laid off, so he didn’t have money to pay the mortgage, he fell behind. The payment was more than $1,000/month, and the loan was serviced by Ocwen, so he applied for a mortgage modification; he told us his story – it went for months, and that turned into over a year, and finally they denied his modification, and they scheduled a foreclosure sale on his house.

Now, the good news is the hedge fund that owned that mortgage offered a whole pool of mortgages to us, which included this gentleman’s home. What we did is we did a broker price opinion, which is kind of like a mini-appraisal on the home, and it came back at $33,000. So we offered 30%, $9,600. So just so your listeners understand that, the debt was — unpaid principal balance on this mortgage was $164,000. He hadn’t paid in several years. There were tens of thousands of dollars in delinquencies, and his payment was over $1,000/month. The home was worth $33,000, and we bought the mortgage for $9,600.

Joe Fairless: So the bank loses in that scenario, right?

Jorge Newberry: Well, somebody loses, clearly, because somebody loaned this gentleman $164,000 and now they’re taking $9,600 for their position, so the bank or the Wall-Street-backed investment fund probably took a big hit at that point, but they’re probably thinking “Hey, this home is worth $33,000. If we complete the foreclosure, we’re gonna have to evict him”, and they’re gonna have to sell the property and pay brokerage… The recovery may be 20k, but there’s still a lot more work, so it makes sense to take the $9,600 offer. I’m sure they thought ti was in their best interest to do it, and that’s what they did. But when we contacted the gentleman and we said “Here’s what we can do – if you wanna stay, we’re gonna drop your monthly payment (again, it was over $1,000) to $320.” So he is like, “Well, that sounds too good to be true. Maybe it’s a scam”, but he checked us out and discovered we really did own his mortgage.

We also gave two other options – “Hey, do you wanna settle this in one lump sum? We’ll take 29k (10% less than what it was currently worth). Or if you don’t want the house anymore, we’ll give you $1,000. So you owe us all this money but we’re gonna forgive the debt and give you $1,000 if you sign the deed to us.”

Those are basically the options, and the way that we’ve had a lot of success is by just giving the options to the family, and they get to decide what’s in our best interest, what makes sense for us to do. Do we wanna pay money and keep the house, or do we wanna get paid and just give up the house and get the debt forgiven? In this case, the family said “No, we wanna stay.” So again, we dropped the payment to $3,200; they owed over–

Joe Fairless: $320, right?

Jorge Newberry: $320 from over $1,000.

Joe Fairless: Alright. You said $3,200, just wanted to make sure…

Jorge Newberry: Oh… That would be not good.

Joe Fairless: “We tripled it!”

Jorge Newberry: Yeah, “We tripled it!” No, we went from over $1,000 to $320. They hadn’t paid in several years, so they owed over $20,000 in delinquent payments, and we took $2,000 and we forgave the difference. And the $320 payment was now gonna be the same payment for the remaining term of the loan, which is almost 20 years. So for them it was like “Oh my goodness, this is cheaper than rent, it’s great deal”, but for us – look at the numbers… We recieved $2,000, and then we got in that first year 10 payments of $320, so another $3,200. So $5,200 on $9,600 investment, so over 50% in the first year.

Then we continue to get $320 times 12 – almost $4,000/year for the remaining 20 years of the loan. So in the first year over 50% return, and then a 30%+ return for the next 19 years. We have all our money back within three years, and then we just have cashflow for the rest of the term.

That’s basically in a nutshell what we do, and I know Wall-Street looks at what we do and they say “Okay, on paper you’re getting these big returns, 20%-30%+, but really Jorge, you’re making like $5,000-$10,000 a deal”, and that’s what it is, $5,000-$10,000 a deal, and for Wall-Street that’s not something that’s worth their while, which creates the opportunity, but here’s where we’ve created a business – we bought $2,500 loans last year, so we make $5,000-$10,000 on all 2,500 loans, so we have a pretty decent business.

Joe Fairless: What is that math? 2,500 loans… How much do you make per deal on average?

Jorge Newberry: About $5,000.

Joe Fairless: About $5,000, got it. So that’s 12.5 million, and you said “make”, so that’s profit after all expenses.

Jorge Newberry: Agreed. It’s just a matter of how soon you make it, but yeah, there’s a lot of money to be made on these things, there really is.

Joe Fairless: Now help us learn how to do this, please.

Jorge Newberry: So this is the challenge – how do you get started? The first thing is to figure out how to buy the loans, and there continues to be a very opaque market, but there are a number of hedge funds, smaller funds that will work with buyers who are wanting to buy just a handful of loans at a time.

A real kind of caution sign is when you’re new it’s very easy to overpay. You can use that situation that I described and said “Hey, the home is worth $32,000. If I get it for 20k, that’s a 12k discount. That’s pretty good.” I might have even thought that 15 years ago, but it’s not very good. You really need a significant discount; you wanna get into the 50% range or less of what the property is currently worth, because if they don’t pay or you don’t come to a resolution, now you’re paying for an attorney to go to the foreclosure procedure, and that can take a long period of time, and your returns as time passes will generally diminish.

So unlike real estate, the longer you hold a non-performing loan, the value will tend to drop, and the reason is the taxes are going up and the property is potentially deteriorating, and just the duration of your investment is extending, so there’s all kinds of reasons you wanna get to a fast consensual solution.

So there’s funds out there, and I can name a few – there’s Granite, there’s Condor, even us, AHP, will occasionally sell loans in one, or two, or three, or four, or five at a time… So I think that’s a place to start. And as you get bigger, if you say “Hey, I can do 50 or 100 of these”, then you definitely go up the food chain and there’s hedge funds and then even banks that will sell to you even in today’s competitive market.
I think the strategy woudl be to maybe learn this while the market is competitive, get your bearings in terms of how all the pieces work, because when this market collapses again – which there’s always a cycle; up, down, up down, boom, bust… And eventually there’s gonna be another bust in the cycle, and that’s where there’s just immense opportunities. But if you decide, “Hey, I wanna buy loans” when all the opportunities are there, it’s gonna take you a little bit of time to figure out what you’re doing.
So I would think it’s a wise time, and it’s the reason why we’re doing this – we’re starting a servicer, which basically — every loan needs to have a mortgage service, so we’re starting a servicer and we’re showing other people how to do this… Because when this crash happens, then there’s no way we’re gonna buy all the loans. We’re not naive, thinking we’re gonna buy every loan that becomes available. We wanna show other people who can find even other sources and other opportunities and do this in a social, responsible manner, which also coincindetally generally maximizes the financial returns.

Joe Fairless: In order to find the non-performing mortgages now, you gave three places: Granite, Condor and your company, AHP.

Jorge Newberry: And I can think of more. I can think of Security National Servicing (SN), they regularly sell loans. Basically, what happens is you’ll call them up… We’re setting up this program called Note Buyer Bootcamp and we’ll add all the resources onto the site. Once you contact these groups, they’ll send out periodic lists of loans. “Hey, we have this one loan available” or “We have these 100 loans available”, and you can bid. Typically, even when it’s 100 loans, they’ll let you bid on one or all 100. Those are a handful, and NoteBuyerBootcamp.com – we’ll put up a list of other sellers in the market and update that as people come and go, which inevitably happens.

Joe Fairless: And once you buy the note, is it just a cash transaction and then you now own the notes? So you’ve gotta pick up the phone and call the people living there?

Jorge Newberry: That’s what you would like to do, but only part of that is true. So it is a cash transaction, so you’re generally wiring the money, you sign a purchase contract… Somewhat similar to real estate purchase contracts, except now you’re buying a note. Then you wire the money to the seller, and they will then send you the documents. What you’re really buying is the note, the mortgage, the title insurance policy and whatever origination documents they maybe have for enforcing this laon – those are shipped to you, those originals, and they’ll also transfer the servicing. Let’s say it’s serviced at Ocwen, and they’re gonna say “Where do you wanna transfer it?” There’s a number of servicers SN Servicing, FCI, BSI, ClearSpring… I think the number one choice should be AHP Servicing, but that’s up to your listeners.

Then you’d like to call the homeowners, but you can’t. In most states, they require that if you’re doing any type of debt collections, particularly on a mortgage, that needs to be done by somebody who has whatever license that state requires. So that means that you usually have to take the loan to a servicer and have them call. This is where you end up kind of having this middle man – somewhat similar to a real estate agent – where they’re the conduit for the interaction with the homeowner, but you can tell them what you wanna do. It’s very simple. You can say “This homeowner wants to stay (just like the family in Maywood). We’ll take a monthly payment of $320. They owe us $20,000 in delinquencies, but we’ll take $2,000. And if they don’t wanna stay, we’ll give them $1,000.”

You can do that, tell the servicer, and that’s basically what they are communicating with the family. The ways they reach out is they can do phone calls, they can send letters, and ultimately they can send people and knock on the door. It starts with phone calls and letters, and then knocks on the door. If the home is vacant, they do a skip trace and they try to find where the people are… And think about it like this – people left, so they probably don’t want the home, but now you’re trying to track them down and say “Hey, I wanna give you $1,000 to find the deed and forgive the loan, so we don’t need to foreclose.” If you can do that and get the deed, and the homeowner is like “Hey, I didn’t want the home anymore and I owe $200,000, so it doesn’t make sense for me to keep it”, but you bought it for $9,600, that’s a big return, and if you can do that in a short period of time, your returns are through the roof… Because the alternative is to go through the long, tedious foreclosure process, which will take time and money, and you’ll still probably make an okay return, but where the returns become extraordinary is where you can reach out to the family and make a deal.

Joe Fairless: I know we talked high-level about this and there are many bullet points underneath each of these, but for the purposes of this conversation, anything else that is a larger point that we should talk about as it relates to buying these mortgages at a discount?

Jorge Newberry: Those are nuts and bolts. It’s so similar to buying a home that is broken in terms of it needs a lot of rehab, it needs a lot of fix-up, or a multifamily property that is in disrepair, has management issues… And then working out a solution in order to fix that house, fix that multifamily, or fix that loan. If you can generate a solution that works for the family, that’s always gonna be your best resolution.

Joe Fairless: How can the Best Ever listeners get in touch with you or your company?

Jorge Newberry: Sure. If they’re interested in purchasing notes, go to NoteBuyerBootcamp.com and you’ll learn about the training program that we offer, which is basically online, and we have some free resources on there as well. You can reach out to that e-mail on there as well, info@notebuyerbootcamp.com.

Joe Fairless: Awesome. Jorge, thanks again for being on the show and talking about buying non-performing mortgages and notes, and how you got into it – fascinating story, about the LinkedIn trust that you had with that gentleman, and it turns out to be a very successful relationship… Definitely you, and he got $4,000, so I’m sure him too.

Jorge Newberry: It was the best $4,000 we’ve spent.

Joe Fairless: Yeah, absolutely… And then just talking about the overall process. Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Rosario shares his real estate investing story with us as well as explaining how his brokerage and online platform, Clickinvest helps investors find deals. From taking hits and being able to bounce back, to easily finding deals via his platform. We can all learn a lot from this episode.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Trevoris my real estate, business, and life coach. I’ve been working with him for years. Spots are limited, so be sure to apply today!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Rosario Terraciano. How are you doing, Rosario?

Rosario Terraciano: I’m doing great, man. Thanks for having me on.

Joe Fairless: Yeah, my pleasure, nice to have you on the show. A little bit about Rosario – he is the co-founder and CEO of Clickinvest. He began real estate in 2003 when he partnered with a real estate broker specializing in distressed real estate. He has since sold over 2,600 properties, and in 2013 was ranked first in Illinois and fourth nationally by the Wall-Street Journal for units sold – very impressive. He is based in Chicago, Illinois.

With that being said, Rosario, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rosario Terraciano: Yeah, absolutely. Thanks again for having me on. I got in real estate in 2003 as you mentioned; prior to that I was in the financial markets; I was trading EuroDollar futures and S&P futures, and it was time to move on. I dove in head first, and for the first couple years I was a wholesaler; I’m sure a lot of the Best Ever listeners know what that is. I was finding deals that were off market, getting them under contract and then wholesaling them out to investors that I was connected to.

I did that for the first couple of years, then got the itch and in 2005 I started building a rental portfolio for myself, I started raising money from family and friends, and doing flips along the way. I got married in 2005, had our oldest son in 2007, and then got completely wiped out in 2008. The market turned, and I was not ready for it… But I was blessed with having good people around me, and that led to launching Ressurecting Real Estate in 2009, which eventually became Clickinvest.

Within the first few years of launching Resurrecting Real Estate, I quickly became one of the top brokers in the Chicagoland area. In 2013, as you mentioned, I ranked first in Illinois and fourth national by the Wall Street Journal for selling 640 homes in one year, that year in 2013. In 2014 I began building out what is now Clickinvest, and in 2016 I partnered with Jeffrey Kershner; he ran the Midwest operations for Invitation Homes, which is a huge hedge fund in the marketplace, and he bought over 4,000 homes for them just over a two and a half year period or so. Then today Clickinvest is just pounding away doing what we do, helping local investors in our marketplace.

Joe Fairless: So your business model now through helping local investors in the marketplace is to do what?

Rosario Terraciano: Taking what we’ve learned being on the REO side and then being investors for ourselves, and then working with these large hedge funds, we saw there was a need in the marketplace for not just a system, but also a team that’s experienced in identifying buy and flip opportunities or buy and hold opportunities in the Chicagoland market. Basically, what we’ve done is we’ve built a proprietary system that identifies deals in the marketplace, goes through thousands of deals a day, filters it down to the best deals based on an ROI or based on a yield if you’re looking to hold the property, and then we have an in-house analyst that will do the final review, package everything for that client based on the client’s numbers, send it to them right to their inbox, and if they like it, they can click a button and submit an offer within seconds… So just expediting the whole purchase process for them.

Joe Fairless: That’s a very turnkey business model, I love that. That’s pretty cool. I wanna spend most of our time talking about Clickinvest, but based on your background and your story, I’d love to ask just a couple follow-up questions, if that’s fine.

Rosario Terraciano: Yeah, absolutely.

Joe Fairless: Let’s see – 2008 hit, you said you got wiped out, the market turned and you weren’t ready… What was the cause of the portfolio getting wiped away?

Rosario Terraciano: I had no idea what I was doing. I’m not sure if anybody listening can relate to this, but I read a book, I got super excited, right…? I’m an excitable guy, I’m very passionate — I saw a show, or two, or three, and thought “Man, this looks really easy.” Back then it was super easy to get money; you were paying super high interest in points, not like today, but it was easy to get money. I raised some money from family and friends along the way as well, and I went out there not knowing a thing about construction, not knowing a thing about how to screen tenants, and got ripped off left and right by contractors, because I had no clue.

I didn’t have the right mentors around me to really come alongside and say “Hey man, do you even know what you’re doing?” I was like, “Yeah, I wanna build a rental portfolio and start buying rentals. In a few years I’ll have a hundred and I can sit back and retire on the beach.” That’s the biggest reason by far – just mismanaged and clueless about what it took to run a portfolio.

Joe Fairless: Cool. Alright, I appreciate you sharing that. The last question I have on this and then we’ll move on to present day… With your investors, I imagine they lost money with you… Because 99% of the time we always hear about “Raise money, bring in investors, two thumbs up, sunshine, roses and puppy dogs”, but then what happens in a scenario where you lose money? Can you tell us about that and maybe some lessons you learned there?

Rosario Terraciano: Yeah, so I’m known for getting beat up quite a bit, and being totally free in sharing my story, because my prayer in this is that people avoid the same mistakes I made, right? So when I partner with family members or partner with friends, thinks about that – these guys were not in a position to invest, most of them. They saw that I was having success, because in an upward market, everybody was having success… Or in an appreciating market. So they started whipping money at me, like “Man, turn money for us!” So I started turning it, and I went from saint to devil within a year and a half. I was literally making everybody money, and then lost everybody’s money… So imagine that, showing up at Thanksgiving and your brother doesn’t wanna talk to you. So not only did I lose money, I lost friendships and hurt some close relationships through it for sure.

Joe Fairless: What advice would you give someone who is contemplating bringing in investors for the first time, knowing what you just said and your experience?

Rosario Terraciano: Are they accredited? Are they a real investor? Because somebody that’s just got 20k or 30k sitting down on the sideline, to me if they don’t have the experience and if they can’t afford to lose that money, they’re not an investor. It’s not worth it. There’s plenty of money in the space today, whether it’s lenders or private capital… Even some banks have just gotten a lot looser when it comes to real estate. Go to the pros. If the banker or lender doesn’t wanna give you money for the deal, then you really need to call a time out and ask yourself why. “If they don’t wanna give me money, should I be going out and taking someone else’s money?”

I’m a big believe in private capital. We have clients that raise money from private capital sources all the time, but these guys know what they’re doing and they have a track record, and they choose to do it not because they can’t get approves from a lender or a bank, it’s because ease of the deal, or whatever, it’s their choice. But if you’re getting declined by lender after lender after lender and all these other sources, I would really just pump the brakes a little bit before you go asking your brother or your cousin or your friend for money, if they’re not in a position to lose it.

Joe Fairless: And just so I’m crystal clear, your business model was fix and flipping?

Rosario Terraciano: Back then it was fix and flip and buy and hold. As I was flipping deals, I was rolling the money back in and buying more rentals.

Joe Fairless: And the domino effect was that those rentals weren’t cash-flowing enough to service the expenses when the market turned, so you lost them?

Rosario Terraciano: Yes.

Joe Fairless: Got it.

Rosario Terraciano: So what happened was I would buy a house for 60k, the contractor told me 25k before we closed, and after we closed it’s now 45k. So yeah, I couldn’t weather the storm, and then the second one person missed – as you said, domino effect and that was it.

Joe Fairless: Got it. Well, I sincerely appreciate and I have little prayer hands right now – I don’t know why, but I’m sending this your way… I sincerely appreciate you sharing that, because as you said, it’s something that’s very valuable for everyone to hear, just a cautionary tale, so thank you for that.

Rosario Terraciano: Absolutely.

Joe Fairless: So since then — that’s in the past, it was ten years ago… Holy cow, that was ten years ago.

Rosario Terraciano: Yeah, way too fast…

Joe Fairless: That was a decade ago… Welcome to today, Clickinvest – what is the number one challenge that you have with Clickinvest right now?

Rosario Terraciano: I think just in general, for real estate investor, and I’m sure you’re experiencing this where you’re at, but definitely in our market it’s inventory. Real estate inventory, specifically distressed inventory, is down 60% in the Chicagoland market just in the last two years. So the average flip for an investor is at a nine-year low. A lot of our clients were used to doing five, six, seven flips a year. Now because inventory is so tight, they’re doing three flips a year, or four flips a year. And when your average profit is let’s say $30,000 a flip, well if you’re doing one to two less flips a year, that’s a big hit to your income and to your lifestyle. So a lot of these guys are just stretched, because with less inventory, it means you’re putting in a lot more time just to find a deal, so your return on time is just really getting crushed.

So I would say that’s the biggest pain point for sure in our marketplace with our clients – the inventory side.

Joe Fairless: Do I have to log in to Clickinvest or something in order to see the deals, where then I click and make an offer, or is there some sort of login process?

Rosario Terraciano: Yeah, absolutely.

Joe Fairless: Okay, so the follow-up question then is when I log in and I see those properties, are they just properties that are listed, or are they properties that you also have another means of getting through different tactics?

Rosario Terraciano: We source multiple ponds. One of the first things I tell a potential client is “Hey look, we’re not a silver bullet. We’re not gonna be the beginning of the end of sourcing for you. We’re gonna be one of your ponds, and we hope we’re gonna be your best pond.” But in today’s market, you need to be working with wholesalers, you need to be working with local brokers that have pocket listings… If you have the cash, you need to be going to auctions, you need to be fishing on the web for online auctions as well, like the Hubzu’s and the Auction.com’s and whatnot.

So what we do is we try to pull in as many sources as possible into our system. The only thing we’re not touching right now are share of sales. But we’ve got wholesalers that we’ve vetted out that we feel do a great job; they bring us deals. We work with the Cook County Land Bank, which essentially is a middleman between Fannie Mae and Freddie Mac in our area, and these are all pre-listed REO’s; we’re their biggest strategic broker. And then we have brokers that are constantly bringing us pocket listings and whatnot… But the MLS has still been our best source because of the technology we’ve built and because we have the ability to go through thousands of properties a day and find those opportunities that a lot of people just aren’t willing to sit down and hit refresh every minute 24/7, waiting for that deal to come out, and then have it completely analyzed according to your deal analyzer, with your cost of capital and your buy side and sell side costs.

So every deal that our client gets has all of their numbers baked into the deal, so they’re seeing the true net profit and the true ROI on every single deal, so they can quickly submit an offer.

Joe Fairless: That is beautiful. What a smooth system that you’ve got, and it really should be a system in every market. Have you thought of doing some sort of licensing or franchising?

Rosario Terraciano: We have. So the goal right now is to get into Florida. We feel like we’ve got a good handle on the Chicagoland market – we’re doing flips, we’re doing rentals… The next market will be Florida, and then once we have a grip on another market, then I think we’re gonna seriously consider whether it’s licensing or just expediting our growth with partnerships or whatnot… But yeah, it’s a life-saver.

We have clients that literally — can I share an example?

Joe Fairless: Please do.

Rosario Terraciano: Okay, so the typical call I get is an investor who’s like “Man, there’s no deals.” I go “Well, we did 47 last month.” [laughter] “No, you don’t understand…” “Well, I understand, but we’re seeing deals, we’re getting deals.” We had so many that signed up within the last week… Before she signed up, she said she spent money, got set up, got educated, did all the things you’re supposed to do; one year later she still hasn’t done her first deal, and she’s like “This is ridiculous. I don’t know what to do.”

Well, another client signed up I think the day before I had the conversation with her… Within two hours got his first deal accepted. That’s not the norm, mind you, but the point is instead of running the 20 or 30 or 40 properties a week, which is what most investors are doing now, only to find that the deal is already gone or that there’s 15 investors lined up outside that door, we’ve built everything in a way that we’re giving you all the information, all the data with the rehab estimate, ARV, all the comps, even a suggested offer price, so that you can review the deal and submit an offer site unseen with confidence, right from your phone. And then we go to town negotiating that deal to get it locked up for you.

So instead of running through 20 or 30 or 40 properties a week that will take you 40 to 50 hours and then doing all the research yourself, within 20 to 30 minutes our clients can literally submit 20 to 30 offers and get them in, and then it’s just a numbers game.

Joe Fairless: What are all of your revenue streams for this company?

Rosario Terraciano: So it’s a subscription model, and it’s two-fold. Every client pays a monthly, because you’ve gotta pay just to have access. There was a time where it was free, and we had an army of tire-kickers that just wasted our time. So it’s a monthly fee to get into the system, and then we have our brokerage, because Clickinvest is a brokerage; it’s not just software. So we have in-house brokerage that does everything – your offer submissions, negotiations, escrow, coordinating delivery of earnest money, coordinating your appraisal inspection, contractor bids… Anything you need, it’s in-house, to get you to the closing table. So it’s all done right in our office, with our team.

Joe Fairless: And then do you have a property management arm?

Rosario Terraciano: We do not. We’re focusing right now on what we feel we’re best at and it’s the acquisitions. We’re not even doing the resale. We do have a ton of partners that we work with that we’re happy to refer out. Anytime we refer out, we don’t make anything; it’s just these are guys that we trust in our marketplace, that we’ve vetted during these 15+ years, and we’re like “Hey, these guys are good.”

Linda Liberatore referred me to you – she runs a management company in Illinois, Secure Pay One, which is like half the cost of traditional property management, which is crazy. So we like to open our network up to our friends, and we tell our clients “Hey look, if you need an attorney, here’s this guy. If you need property management, here’s this person. If you need an education provider or somebody to just help take you to the next level, here’s this person.” So we feel by being that hub we can really help our clients just cut down the learning curve, if that makes sense.

Joe Fairless: Absolutely. It’s such an intuitive business model, too. Those two revenue streams are very logical, that makes a lot of sense. There are costs associated to the software development and maintenance, as well as the team, and then just the value that’s created through the subscription, and then the brokerage – obviously, that’s pretty simple for what you do there… Not simple for what you do, but just to understand why you have that in place. And I forgot Linda introduced us… Now I connected the dots right when you said that.

When was Clickinvest founded?

Rosario Terraciano: 2014 is when we started to build it out internally, but it officially launched last year in 2017. So we converted Resurrecting — well, really we merged Resurrecting Real Estate, which was the brokerage, with Clickinvest, which was the tech arm, and now it’s all bundled under one banner, which is Clickinvest.

Joe Fairless: And why change the model from what you had in 2013 when you were being recognized by Wall-Street Journal to something different? It seems like that first thing was working really well.

Rosario Terraciano: I love you… That leads right into one of the nuggets – knowing your cost. I told you I’m like a student of pain, I guess… So all that stuff is fluff, man… I can’t stress that enough.

Joe Fairless: We don’t like the fluffy stuff here.

Rosario Terraciano: Well, you’re gonna love me then, Joe. [laughter] So everybody’s like “Oh my gosh, top broker! Wins fourth nationally! Blah-blah-blah…” I didn’t understand margins. I didn’t understand my cost, and I think that’s a big mistake that a lot of people make, but I’m just gonna [unintelligible [00:20:22].14] So I go into this and I was so bent on being number one and top line and selling more real estate than anybody else, and paid no attention to my bottom line, none whatsoever. So I had 25 people in my office, I had virtual assistants in the Philippines and India, I had field operations… I had this crazy heavy operation, and overhead was through the roof. Nine million bucks over a 3-4 period (maybe less), but my margins were ridiculously low. And at the end of the day I’m like, “Okay, time out.” I just hit the top of our game and had nothing to show for it — I don’t wanna say nothing; a ton of experience, but not as much as I thought from the financial side… My poor wife and kids, they’re like “Wait a minute, weren’t you like number one?” “Yeah…” “Weren’t you ranked fourth?” “Yeah…” [laughter] “Why don’t you have the fancy car and why aren’t we in Hawaii for a month or two?” I’m like, “Well, kids, you’re gonna learn about margin.”

It was just ridiculous, so I called a time out in 2014, I’m like “I can’t do this anymore. I can’t run at this speed anymore”, and my solution back then was just hire more people, like that solves problems. That’s not what’s gonna solve problems. You have to leverage technology, you have to outsource your low payoff activities, and you have to really figure out what your return on time is, because at the end of the day… Investors always make this mistake, I deal with it every day – they’re always looking at the gross. Who cares about the gross? What’s your net? What are you walking away with at the end of the day, and then back into everything?

So the reason we made the switch was I, number one, couldn’t maintain the amount of staff I had, because the overhead was 150k/month just in payroll. And then number two, I’m like okay, if we’re going to do this because we know we have a system that works, how do we automate 80% of the processes? And that’s where Clickinvest was born. We said, okay, let’s take the filtering of properties, let’s take the transaction coordinations, let’s take the contract creation — we had two people full-time just drafting contracts. Now one person could send out 200 offers a day, with technology and what we’ve built out.

So we had to rebuild to survive, or there was no way we would have made it, not a chance. And then along the way we figured out “Wow, we have something really cool here, and this can help a lot of people.”

Joe Fairless: Thank you, again, for sharing that. That is a lesson that we all should pay attention to… If we’re not, then we’re gonna have a similar story that you just had, where we’re gonna reach the top of the game from a perception standpoint, but then have not a lot to show for it monetarily. And your return on time, as you said, is something we need to focus on… And the net — not the income coming in, but what you are actually putting in your bank account.

Based on your experience in real estate — we’ve talked about a lot of lessons and a lot of advice… What is your best real estate investing advice ever?

Rosario Terraciano: I would say just driving home knowing your margins… Going back to that and just understanding that. What do you want? Everybody wants to make a million bucks. You know, been there, done that; it’s not gonna give you happiness. It will help a little bit, but believe me – happy wife, happy life. I’m a man of faith, I’m involved in my church, my kids are a huge blessing to me… That’s what fuels me nowadays. So don’t get so caught up in top line, and when you get there then you’ve made it, because when you get there, it may not be where you wanna be… If that makes any sense. Or when you get there, it’s not what you thought it was gonna be.

So just work smarter, pay attention to your return on time, because what you don’t wanna do is lose ten years of your life only to look back and be like “What the heck was that for?” And even worse, be like me – spend ten years of your life, and then look back and be like “And I didn’t even make what I thought I’d make.” [laughter]

Joe Fairless: But you had a really good story to tell us, so it’s all worth it. [laughs]

Rosario Terraciano: Yeah, there you go.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Rosario Terraciano: The Power of Positive Thinking, Norman Vincent Peale.

Joe Fairless: Best ever deal you’ve done?

Rosario Terraciano: I would say a deal — pulling in 300k in commission in one month was pretty sweet.

Joe Fairless: And that’s profit, yes?

Rosario Terraciano: [laughs] That was gross.

Joe Fairless: Oh, we’re still talking gross, huh?

Rosario Terraciano: [laughs] Oh, man, I know…

Joe Fairless: Old habits die hard, right?

Rosario Terraciano: Absolutely.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Rosario Terraciano: Assuming. Never assume. Assuming that somebody’s dropped off earnest money, or assuming that a house still exists. Because sometimes they get torn down before closing.

Joe Fairless: What’s the best ever way you like to give back?

Rosario Terraciano: God willing, one day I’d love to get into full-time ministry, whether as a pastor, or youth minister, mentor, whatever.

Joe Fairless: And how can the Best Ever listeners get in touch with you?

Rosario Terraciano: Cell phone – I try to be as available as possible, except on the weekends. 708 369 3151. Or check out Clickinvest.com, and then my information is on there as well.

Joe Fairless: Rosario, a lot of life lessons, a lot of real estate lessons that are applicable – I’m gonna speak personally – for me, just to have things reinforced, as well as just hearing the things you’ve learned and how you’ve evolved the business too with Clickinvest.

Clickinvest sounds like a beautiful business model for you and for investors number one… And then from bringing investing partners into it, your approach is now if you do, make sure they’re accredited, so they are at the financial level of being able to have their investment dollars at risk. You’ve talked about the downside of what happens when a deal goes the opposite direction and you’ve got family and friends investing, and then also margins.

We can be recognized by New York Times or Wall-Street Journal, but it doesn’t mean that the business is optimized for long-term growth from a profit and loss standpoint… So really taking a look at our return on time.

Congrats on Clickinvest and what you’re doing there, and looking forward to staying in touch. I hope you have a best ever day, and we’ll talk to you soon.

Jared started in real estate 5 years ago. Now he has over 75 rental units of his own, and manages over 100 more for his clients. Jared prefers the south side of Chicago, which he says is an often forgotten area of the city. He has a lot of wisdom to share with us today with both investing and managing properties.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Made Possible Because of Our Best Ever Sponsors:Are you looking for a way to increase your overall profits by reducing your loan payments to the bank?Patch of Landoffers a fix-and-flip loan program that ONLY charges interest on the funds that have been disbursed, which can result in thousands of dollars in savings.Before securing financing for your next fix-and-flip project, Best Ever Listeners you must download your free white paper atpatchofland.com/joefairlessto find out how Patch of Land’s fix and flip program can positively impact your investment strategy and save you money.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jared Kott. How are you doing, Jared?

Jared Kott: Joe, I’m doing great. Thanks so much for having me.

Joe Fairless: Well, that is great to hear. It’s my pleasure, and I’m looking forward to diving in. A little bit about Jared – he is based in Chicago, on the South side of Chicago. He lives where he invests. He has accumulated 75 rental units, he’s got over 100 under management. He also manages his own stuff, as well as for other people. He’s the owner of Marblestone Property Group, which is a property management company, which I’ve just mentioned. With that being said, Jared, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jared Kott: Sure, Joe. I started in real estate just shy of five years. Prior to that I was a corporate guy, working in downtown Chicago for some insurance firms… And unbeknownst to me, I bit off a little bit more than I could chew, I was fired, I was too proud to go back, and at that time in 2013 I spent a lot of time looking for deals but never had the courage to actually go out and invest myself. So I looked at this as just a perfect opportunity to jump in.

So I jumped in in February 2013, started absorbing every piece of knowledge, from books, podcasts, local REIA’s, relationships – anything I could use to learn about real estate, because I didn’t have much going on when I got fired. That’s kind of how I got started.

I worked for a guy for free for about 4-5 months, and learned a lot… He owned a management company and I learned a lot about how I didn’t wanna run a company, after about 60 days working with him.

I purchased the first unit – that was like 5th August, 2013. $25,000, Joe. A $25,000 brick two-flat on the South side of Chicago. I still have it.

Joe Fairless: Okay. Obviously, a couple questions and then we’ll keep rolling. One is you said you bit off more than you could chew so you got fired; what did you get fired for?

Jared Kott: We just didn’t see eye to eye. I think it was more of my personality of a guy that kind of — I just don’t sit back; I’m a driven guy that kind of likes to rock the boat, bring new ideas, and the company I was with at that time was more structured, “Let’s follow every procedure to a T”, didn’t like new ideas… And they just said “Hey, do you know where conference room B is?” and I knew that was my time being on that chopping block. [laughter] But it was the greatest thing that could have ever happened to me really, and [unintelligible [00:04:38].08]

Joe Fairless: [laughs] That’s funny. Alright… You said you got started by reading books, you worked for a guy for free… I think you mentioned how long, but I was trying to take notes and I didn’t catch it. How long did you work for someone for free?

Jared Kott: I worked for this guy for about four months. I met him at a REIA, exchanged some business cards and contact info and stuff, and I said “Listen, I have a lot of time on my hands. I’d love to learn the business.” I think he threw it out there he’s looking to train guys, and stuff like that… So that’s kind of how I made that introduction, and I remember — I didn’t have a car at the time, I had a Harley Davidson, and I rode my motorcycle down to one of his properties and met him… And it was crazy – there was like stickers on the door, the place just looked completely run down. He was banging on the door to get some rent, and I said “Man, I don’t wanna operate my business like this, but I could sure probably learn a couple things.”

Joe Fairless: You did that for four months… What were your responsibilities during those four months?

Jared Kott: It was more kind of just like — and I work well like this, Joe… I was like thrown into the fire. I was delivering five-day notices, calling tenants for back rents, updating utilities with the water companies and stuff like that. Looking back, it was a really good exposure, because sitting in an office you don’t know these things that you have to do to manage properties on a day-to-day basis… You know, the proper way to do it.

Joe Fairless: You said that you learned some things that you wouldn’t apply towards your business now… What are the things that you learned that you don’t do?

Jared Kott: Well, this is the key – there were zero processes in place, and when there’s zero processes in place, it’s chaotic all the time. Absolutely chaotic. So what I decided at that time was I needed to be able to create processes fairly quickly, so when I jump off on my own to start this, that I can scale, I can repeat, there can be consistency… Because there was none of that in my experience with this guy.

Joe Fairless: Now you’ve got over 100 properties under management… Tell us about the internal process structure that you have set up with your business now.

Jared Kott: Really good segue. So one of your past guests, Linda from Secure Pay One – I got to know her about two years ago… And I thought I had some processes in place, and they were decent, but it’s just not my skillset. So what we currently do now – we have a relationship with Secure Pay One, so all of the backroom stuff is done through Linda and her team… So the write-ups of the leases, all the data that goes into our management system – we use Buildium – all the rents that go in… All of that backroom stuff is done not in-house, not in our office, it’s done with Secure Pay One. That leaves us to be able to focus on boots on the ground, relationships with the clients where needed, sourcing more deals, bringing more management opportunities in the door.

Joe Fairless: For me to understand the business relationship more in terms of responsibilities, you said it allows you to focus on relationships with the clients and boots on the ground… So what are the boots on the ground doing from a management standpoint?

Jared Kott: Well, this all started in Chicago, if I paint it with a broad brush. It’s not the easiest place to manage properties. There’s just a lot of activity – people hanging out a lot of times on the larger units (three, four bedrooms), you have to do quarterly inspections just to stay up on the tenants… It’s just a very, very high touch, so we like to be visible, and we’re very clear with our tenants when we go through the interviewing process and the leasing and things like that, that we will be around. We’re not a hands-off operation where you just sign a lease and send the rent checks into the office. We don’t operate like that; we will be around.

So we do a lot of that… It’s the sixth of the month today, and there’s a couple folks in the portfolio that are late, so today that’s what our stuff is out there… Getting to five days out on the sixth. We’re just really on top of the things that [unintelligible [00:08:50].05]

Joe Fairless: Now let’s talk about 75 rental units… You started five years ago – how much money did you start with when you were buying deals?

Jared Kott: I had a small retirement account. I looked at it as it was liquid; I would have done things completely different now, learn some different strategies with investing with IRAs and things like that, but… I started with 250k, and I was just draining my 401k. It was basically everything I had, right? So I was taking it from the 401k, I was buying assets at the time for 20k-25k, putting 30k-35k into them, and then refinancing them.

I also had a small HELOC from a condo that I owned downtown, which was good… And things were great, until two things happened. One, I ran out of money. I saw the light at the end of the tunnel, that I was gonna run out fairly quick. And then two, I didn’t pay tax on any of that money, so I got a nice bill from the IRS. It was just a lack of knowledge.

So when I started to realize… I think I had like 10-12 units, Joe, at the time, so there was no debt, money was coming in and it was okay, but it was like “Who wants to stop at ten”, right? You’ve gotta keep going. So I went to a bunch of different banks… Remember in 2013, 2014 we were still bouncing off the bottom in terms of pricing here on the South side of Chicago, and not having a W-2 job made it really difficult for me to get financing to carry on. So I went to 21 banks, and I had a pretty decent plan put together…

Joe Fairless: What was it?

Jared Kott: What was the plan?

Joe Fairless: Yeah.

Jared Kott: It was like a 24 months rinse and repeat, sort of the BRRRR strategy before it was coined that… And all the banks loved it, but they said “You’ve only been doing this nine months, you don’t have a W-2 income anymore… Come back to us in a couple of years.” And I was like “I don’t have a couple years. I’ve gotta keep this train moving.” So I ended up hooking up with a local lender, a higher interest REIT; I wouldn’t say hard-hard money, but it certainly wasn’t soft… And they gave me a line of credit, so I pledged my assets and then from there I bought ten more, and went to a community bank that all the while I had been nurturing a relationship with, a local community investment corporation, and then they took me out. Since then, we’ve been just rinsing and repeating back and forth. It’s been a nice relationship.

Joe Fairless: What are the terms?

Jared Kott: Double-digit, like ten and two, so you’ve gotta be really, really good at your process on construction. We can’t be sitting on these things too long; we have to get in and get out of them… But certainly want to rent it up. My play down here is it’s all about high cashflow. What it’s worth on paper to me is not nearly as important as the monthly cashflow, so that certainly can cover that service.

Joe Fairless: On average across your portfolio, what does one unit cash-flow per month?

Jared Kott: Just under $400.

Joe Fairless: $400. And that’s post-renovation, correct?

Jared Kott: Yes, correct.

Joe Fairless: Okay. So your model is you buy for cashflow, and maybe it depreciates, maybe it doesn’t, but the cashflow is the main thing… And is a typical deal about a 25k purchase, put 30k all-in, and then rent it out and cash-flow the $400?

Jared Kott: Yeah, that’s the model. Now, things are beginning to change. The assets that you could buy for 25k-30k are now in the $50,000 range, and rents certainly aren’t in line with the increase on that… But there’s still significant play for cashflow, but it’s not what we’re used to seeing, hence why we’re slowing down a little bit, and growing the management and really continuing to tighten up these processes, because — I don’t know; I don’t have a crystal ball, Joe, but I do think something is gonna change… I don’t know what or when, but I just kind of — and again, I haven’t seen a full cycle, so I may be way too early making this assumption, but it just seems to me like prices are a little bit out of line.

I’m seeing stuff in our local market, apartment buildings where some off-shore money is coming in and purchasing stuff for 80k-90k a door. At that, you’re gonna be cashflow-negative, so to me it doesn’t make sense; I’m gonna sit back for a little bit.

Joe Fairless: If a project does cash-flow the $400, but you’re paying more for it than you were previously, would you still buy it?

Jared Kott: Yes. Depending on the location and the deal, yeah. I’m never gonna turn away a deal, but it’s gotta be a deal, it’s gotta cash-flow.

Joe Fairless: Cool. It’s incredible what you did with $250,000 five years ago… How much was the HELOC loan?

Jared Kott: The HELOC was just under 100k… It was like high 80’s, so that I can move around.

Joe Fairless: Alright. So under 350k, about 330k… You basically took 330k and in five years you now have about 330k in annual cashflow as a result of it, right? Because $400/month per property, times 75 properties, that’s 360k cashflow/year.

Jared Kott: Yup.

Joe Fairless: And would you say it’s just through the tried and true you buy a place, you renovated it, you’re refinancing into a loan and then you’re taking that cash back out and put it into a new deal that cash-flows? Is that basically the model?

Jared Kott: That’s it. Yeah, it’s like a see-saw. The line of credit will go up, and then the permanent debt will take it out, and it’s back and forth, back and forth, back and forth.

The only issue that we currently are running into is with our local bank. And it’s not really an issue, it’s just kind of like as you evolve, you go into uncharted waters… We’ve hit a ceiling cap in terms of debt with them, so we have to refi out of them now to get more relief, to be able to continue that cycle if we choose to do it. But I do think in the future that our model is gonna be more towards scaling up in the larger buildings.

These assets, single-family homes, 1-4 units – they’re great, they cash-flow like crazy; as we’ve touched on earlier, there’s a lot of high touch and a lot of just administrative work for it. If you have 50 properties — let’s just say you have 50 properties and they’re all two-flats, so you have 100 units. That’s 50 grass to cut, 50 water bills, that’s 50 rent checks… I mean, it’s 100 rent checks, but you get the point – there’s so much of it, where if we can get more doors under one roof, I think that’s our next move.

Joe Fairless: You told me before we started recording that you listened to podcasts, so maybe through that you just — through your experience and my questions, you’ve basically stalled my question… You answered this; perfect, thank you for that. And that was, I’m sure a lot of listeners have a similar goal of “Hey, I’ve got some money”, whether it’s 330k, like you had available, or whether it’s 100k or 50k or 10 million (I don’t know), whatever it is, but “I’d like to take that money and turn that into that amount of cashflow in five years”, and that’s exactly what you did – you took the money you had to invest, and in five years, boom, now it’s actual cashflow… So what suggestions would you give a listener who wants to replicate what you did and maybe some cautionary things along the way we should watch out for.

Jared Kott: Let’s use round numbers. If you can get 300k, I would probably find the right partner and try to get it to 600k. I think that partnerships can really get you to the next level quick. If that’s not the road you wanna go, I think that leverage is your answer. Start now developing relationships with your lenders, your bankers, your private investors. It’s very difficult to go to somebody and say “Hey, I have this idea, let’s make this happen” in terms of institutional money, right? If you can begin it early, start and put a couple deals together and continue to leverage up, I think that’s probably the quickest way to do it.

Or some guys – I didn’t go this route – just swing for the homerun on the first one. I couldn’t put all those pieces of the puzzle together, so the way that I started was “I’m gonna do a two-flat, and then I’m gonna do another two-flat to make sure that this one wasn’t just a gimmick.” Then I did a four-flat, and then I sought a few single-families… I think there’s a lot of ways to do it, but I think the ultimate answer here is it’s all about relationships… Relationships and action – that’s the way to make it happen. And don’t wait. I got fired on a Friday, and I literally signed up for a week-long training session on Monday.

Joe Fairless: Which one was it?

Jared Kott: It was a property management program for community investment corporation (CIC), which is here at a local college. Then there was another guest who actually I’m buddies with out in Virginia, Jim Ingersoll, and he had a Bank Elimination Blueprint program, him and Daniil Kleyman, and I bought that thing for $500; there’s 100 hours of content and it’s amazing. If you don’t have a job, you have a lot of time, and I just absorbed all that stuff that I could.

And don’t be afraid to ask questions. Anybody who’s listening now and just trying to get into this, and “How do I break through?” and “How do I get started?”, “How do I make this happen?”, ask people. Nobody was just born with all these answers.

Joe Fairless: How good are you at swinging a hammer?

Jared Kott: I’m horrible.

Joe Fairless: You’re horrible, okay. So you’re not a handy guy.

Jared Kott: No, not at all.

Joe Fairless: Alright, what role did you have in the renovation process at the beginning and now?

Jared Kott: My role in the beginning was — I also wanted to learn, right? That’s why I worked for that guy for free. So I would talk to the guys who were on the job sites during some — because there was a construction arm that was construction arm that was going on… And I would ask them, “Hey, how long is this gonna take? I’m not your boss, I’m just curious… How long is this gonna take to frame this up? How many sheets of drywall is 500 square feet?”

Then I would go to Home Depot and I would look at how much is a piece of drywall, how many sheets is it gonna take, and then I would know the time. Then I would ask that question, like Grant Cardone says, 10x. I would ask ten people the same thing, over and over, to see if I’m in that same realm. So that’s kind of how I began to do it, and now what I do is I just deal with referrals and relationships and guys that I trust to get things done.

I’ve done some demo work on days where I was frustrated, but I’ve never–

Joe Fairless: After you went to conference room B?

Jared Kott: Yeah, exactly… [laughs] But I’m just not a handy guy.

Joe Fairless: Well, that give encouragement to everyone out there who is not a handy guy or gal, that’s for sure, but wants to replicate this process.

Jared Kott: Sure. And again, get the systems down. Every city has probably got some weekend course on construction management, or something like that. Learn the basics, because it’s important to know the basics. I’m not saying you have to know how much a piece of drywall costs, but you should know about some pricing in the beginning, and then you can get project managers and things like that to kind of take it over… But you just don’t wanna get taken for a ride too early.

Joe Fairless: What is your best real estate investing advice ever?

Jared Kott: Start now, and when you make mistakes – because you will – everything and anything is fixable. Don’t freak out.

Joe Fairless: You mentioned something earlier I’d love for you to elaborate on – you said you had a small retirement account, knowing what you know now, you would have done things differently. What would you have done differently?

Jared Kott: I would have had the 401k transferred – and please, to the listeners, I’m not an expert at this, so I’m just telling you what I would have done, but I would definitely sit down first with an accountant to make sure that it was the right way to do it… I would have taken the 401k, put it into an IRA, and then I probably would have found somebody with a similar account balance that was willing to lend back and forth at very low interest rates, so we can continue to move money back and forth. We do do some stuff now. But I just wouldn’t have withdrawn it like it was an ATM; it was one of the worst mistakes I could ever make.

Joe Fairless: Why?

Jared Kott: Because it was like a $50,000 bill, if not more.

Joe Fairless: At the end, when you weren’t expecting it?

Jared Kott: Oh yeah.

Joe Fairless: That’s fun.

Jared Kott: Yeah, it sure is… But it’s one of those things, Joe – you make that mistake and it will never happen again.

Joe Fairless: You won’t make it again!

Jared Kott: That’s right, we’ll not make that one again.

Joe Fairless: What did you do to make sure that didn’t happen again?

Jared Kott: Well, I don’t believe in the markets anymore, so I put my money into cashflow real estate… So I won’t have to worry about that anymore.

Joe Fairless: Boy, that’s the second time today I’ve heard this book mentioned, and I bought it after — I haven’t read it, because I’ve just bought it, but after the person mentioned it on the last interview I said “I’m gonna buy it as soon as the interview is over”, so I’m looking forward to reading it.

Jared Kott: Awesome.

Joe Fairless: Best ever deal you’ve done – not the last one and not the first one… One of the in between.

Jared Kott: Sure. I offered a guy $20,000 on a four-flat, he didn’t wanna take it, and I noticed he had a Las Vegas ball cap on, so I was talking to him and it was him and I doing kind of a direct feel sit-down, and I said “What else do you like doing besides hanging out in the neighborhood?” and he goes “I love Las Vegas.” And I said, “How about this – how about I get you a limo and some plane tickets and a hotel around $12,000 or $15,000 for the house?” He goes “You know what, that might work.” The whole thing, Joe, came up at $19,000, but it was… It’s perception, so… Yeah, he took it, and we did it. [laughter] Yeah, Vegas four-flat, baby.

Joe Fairless: Wow. How much does that make you a month?

Jared Kott: [unintelligible [00:24:17].23] $4,300.

Joe Fairless: Do you have debt on all your deals? I guess you do, because you do the cash-out refinance on them…

Jared Kott: Yeah, I do.

Joe Fairless: Okay. And that’s what you were saying earlier, where you’re about to reach a limit?

Jared Kott: Yeah.

Joe Fairless: Okay. Who do you have the debt with?

Jared Kott: I have it primarily with one bank, the commercial lender here, a community investment corporation.

Joe Fairless: Okay, just a local bank…

Jared Kott: Local, yeah. They’ve been around for like 30 years. Again, I try to deal with experts in the field, so this is what they do – they work in somewhat distressed neighborhoods and they lend to owner-operators.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already.

Jared Kott: I make them all time. I think my personality is — if you look at the disk, I’m [unintelligible [00:25:03].05] so a lot of times I don’t think through things as clearly and as detailed as I should… So I guess my mistake is I’m all gas, no break… Which can be good.

Joe Fairless: [laughs] Can you think of a specific example where that’s burned you?

Jared Kott: Yeah, I hired somebody about three months ago, and I had to let them go two weeks after… It was just because I shouldn’t be in charge of hiring. I was like, “Can you fill this role?” “Yeah.” “Okay, let’s go.” And then I just said “I’m really sorry, I made a big mistake here. It’s not you, it’s me.” I know it sounds like high school dating, but this is all me.

Joe Fairless: Because you just assumed that people will have the same type of drive and attitude as you have who you hire… It’s like “Okay, you say you can do it? Alright, you’ll do it…” and not everyone’s like that.

Jared Kott: Exactly.

Joe Fairless: Best ever way you like to give back?

Jared Kott: I try to mentor some men and women, mostly guys who are looking for a better way of life; I try to give them advice and spend time with them using real estate as a vehicle that can get them out to the next place that they wanna be if it’s not where they currently are.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Jared Kott: Check out our website, mpghousing.com. You can check us out on Facebook at Marblestone Property Group, and there’s a bunch of links where you can reach out to us. And if you’re in the Chicago area, we’d love to talk to you.

Joe Fairless: Mpghousing.com, that is also a link in the show notes page. Jared, thanks for being on the show and talking about your last five years. You $330,000 in five years, it now brings in $360,000 cashflow, and doing it through the renovation process of a home, then you refinance, take that money, put it into something else and continue to rinse and repeat… Scaling along the way, lessons learned, process approach – all good stuff.

I really appreciate you sharing some insight and your story with us. I hope you have a best ever day, my friend, and we’ll talk to you soon.

Ryan is a contractor and investor who specializes in training investors how to deal with contractors. This is huge as investors, especially flippers. With proper construction knowledge you’ll be able to save money on bids, as well as keeping yourself from being taken advantage of.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Made Possible Because of Our Best Ever Sponsors:Are you looking for a way to increase your overall profits by reducing your loan payments to the bank?Patch of Landoffers a fix-and-flip loan program that ONLY charges interest on the funds that have been disbursed, which can result in thousands of dollars in savings.Before securing financing for your next fix-and-flip project, Best Ever Listeners you must download your free white paper atpatchofland.com/joefairlessto find out how Patch of Land’s fix and flip program can positively impact your

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Ryan Garcilazo. How are you doing, Ryan?

Ryan Garcilazo: I’m good. How are you, sir?

Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Ryan – he is the owner of the Garcilazo Group and he trains people who are just starting out – contractors and wholesalers – how to rehab, because he has rehabbed nearly 600 homes and worked with nearly 1,000 investors. He won the Top 550 Contractor Award the past four years and earned a top stop on the Inc. 5000 list.

As he said right before we started the interview, he said he wants investors to see the flip through the eyes of a contractor, not necessarily the investor. With that being said, Ryan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ryan Garcilazo: Thank you for having me on. So really quickly, my background is [unintelligible [00:02:58].29] for the past ten years. We own the Garcilazo Group, and in that company we are a general contractor that services Chicago and Florida, and over the years we basically rehabbed over 600 homes, probably closer to 700. [unintelligible [00:03:10].27] about the first hundred or so, because they were all messed up. I don’t wanna count everything that we messed up, but hey, they do count. At the end of the day, we figured out the business and we did figure out exactly how to do this business right and scale it as contractors.

One of the things we realized first and foremost is our investors simply didn’t understand how to rehab, which is common everywhere, in every state, on every coast; it doesn’t matter who you are, what program you come from, where you learned how to invest, rehabbing is a strategic game that you must master.

For example, you have investors who are learning how to real estate invest; that’s one half of the battle. If you really wanna touch a home and you wanna rehab it and you wanna do something physically to alter its appearance, you have to know how to do that, because just having a general contractor alone is not gonna get you to the promised land; as an ex-general contractor, I made money off every line item – I hit you with a GC fee, I have change orders coming up my ass, and you are gonna pay them. Why? Because you’re scared I’m gonna walk away. You didn’t know how I do my job; you didn’t understand the construction process. Because at the end of the day, like I always say, real estate is one industry, and construction is a whole separate industry. You have to know both to flip a house.

So what we decided to do after all these years, we said “You know what, there’s an opportunity here”, because I’m tired of seeing and hearing all these investors going to all these meetups worldwide, nationwide, and the first thing out of their mouth is “I need a new contractor.” Not necessarily true. What you need to start saying is “I need further education and training on rehabbing in constructions.” That’s when we opened up the Rehab Depo Inc. based out of Chicago.

What we have a is a three-month program where essentially we do one month of classroom time with an investor. We show them how to rehab through the eyes of a contractor. We teach them how contractors operate, how they think, how they work, where they’re fraudulent, where they try to scam you, where they try to pad things, how to price, how to bid, the whole nine.

The second month is all ride alongs and the third month is hands-on in our state of the art rehab facility where we’re actually gonna teach investors how to cut their own drywall and install their own drywall, how to paint properly, how to frame a wall, how to frame a window, how to frame a door. Why is that important? Because as an investor, if you can understand the time it takes to do these installs, you’ll have a better respect for your contractor. More importantly, you’ll also understand how long certain tasks take in a rehab, so you can better calculate how long a project is gonna take. So you’re in control.

The whole idea is we’re no longer the adversary, we are your advocate, and we wanna put you in the driver’s seat so you have enough leverage to negotiate and work side-by-side with your contractor, so you don’t have to wonder if he’s lying, you don’t have to wonder if this is true or not true, you’re gonna understand the permit process, you’re gonna understand how architects work, you’re gonna understand how to read blueprints… We’re gonna teach you the art of constructions, fully-focused on rehabbing. We’ve been doing that all year, and it’s an amazing, amazing turnaround, I’ll tell you that.

Joe Fairless: What are some common things that contractors do to pad their bottom line?

Ryan Garcilazo: For example, at the end of a bid usually you should have the GC fees. When we were contractors, I always had a GC fee. I wanted my clients to know what I’m making as my overhead. The GC fee in the common world can be as high as 33% if this is a consumer job. What do I mean by that? I mean, if you call me to remodel your kitchen, I could easily charge you 33% markup, and you’re gonna pay it, because that’s consumer world. In a rehab, we all know as investors – because I’m an investor as well – that you do have a budget, and usually that budget is very, very tight; in our reality, we investors always want the best quality, the best materials, with the lowest budget possible. The reality of what I’ve just said doesn’t work; it’s logic. You can’t have the best without paying for the best.

The other thing is in this business you’re never gonna get the A contractor, because the A+ contractor doesn’t rehab. They don’t need to. They’re all building Chipotles and McDonald’s and skyscrapers. Why? Because they have their market and their margin where they can make their 33%. What’s happening is a lot of contractors now are coming into this game of rehabbing, and they’re still thinking they can mark up the same price, and you just can’t do it, because the rehab budgets don’t hold 33%. You have to be able to charge 10%-30% and go after volume.

The contractor that scales his business to 100 properties a year — it’s because I was charging 10%-13% per project as my markup, but I was able to do 10-20 projects a month because of that. This is a volume game.

So that’s one area where contractors are able to pad projects, if they’re not putting in a GC fee, because they’re not being honest. For whatever reason, they don’t want the investor to see what they’re making. I don’t see why this is business.

So what they’re doing now is if the electric line item for a full gut rehab is 13,5k in Chicago, they’re gonna make it 15,5k in Chicago and they’re gonna put 2k in their pocket. Then they’re gonna put in a line item, or maybe the whole house needs to be [unintelligible [00:07:48].07] in Chicago for 16k – they’re gonna make it 18k and put another 2k in their pocket.

All they’re doing is they’re messing up their accounting, they’re messing up their books; they’re gonna have poor money management when it’s all said and done, and who suffers? The investor. Because the guy is trying to take money off every single line item, but he can’t track that; that’s an accounting nightmare. Whereas, all you have to do is put your GC fee at the end and say “I’m making (I don’t know) $6,500 of this $100,000 job. Great, more power to you. It’s very easy now to calculate your cost because you have a line item for that, and if you had a hard money loan that’s coming in from your investor, it’s easy to track that because most hard money loans have a line item on the [unintelligible [00:08:27].09] sheets for a GC fee… But contractors don’t know that, and investors don’t know enough to share that. That’s why we’re here.

Joe Fairless: When you started out doing the rehabs on homes, what were some of the mistakes you made that you referenced earlier?

Ryan Garcilazo: When I first started off, I really didn’t have a grasp on understanding what a fix and flip versus a buy and hold price points would be. I didn’t have a grasp on what a full gut, a medium gut and a cosmetic is. Really, I didn’t, until you get in there. And then all of a sudden you have the problem solved.

I like to consider rehabbing from a contractor’s level like medicine – when a doctor is in surgery, he’s got a team of nurses and another physician usually with him. Why? Because they’ve gotta problem-solve, and you have to be able to problem-solve immediately. You can’t just let the patient lay there. Well, a house is the same way – when you run into a problem, you’ve gotta have a team, and that team is supposed to work together with you cohesively so you guys can problem-solve and figure out how you’re gonna get that [unintelligible [00:09:23].00] off the wall or the ceiling, how you’re gonna get your [unintelligible [00:09:25].26] is the house is too wide? Do you need to do something else? Do you need a column? If you’re in the basement, and you realize in Chicago you need seven feet and you don’t have seven feet, okay, now you’ve gotta excavate. That was a problem for us. I knew nothing about excavation; I didn’t understand the whole process of you have to remove the current concrete [unintelligible [00:09:43].20] you have to hope that you have footing on the exterior walls, because if not, you’re risking the house collapsing… And then it’s also about the season. We’re in Chicago, it’s cold all the time. Our winters are like Antarctica, bro. So we have to continue thinking about all the outside elements and outside variables on top of that.

I was not prepared for that in my early 20’s… I simply was not, because I wasn’t seasoned enough. So it just felt like problem after problem after problem, and then you add the contracting issues of learning, with a huge learning curve, add that to investors who also were very new, who didn’t understand a) how to rehab, b) how their lending worked, so I wasn’t getting paid on time. I didn’t even know how to submit a real draw, to be honest with you… So there’s the accumulation of a lot of issues that kind of combusted into an explosion.

So you learn very hard, and it was very financially costly on both sides. So that’s again another reason why we saw the opportunity over the years. Once we started really focusing on quality and material choices and design and how funding works, we became a powerhouse contractor and there was nobody to compete at our level, because we understood both sides of the fence – we understood real estate, we understood investing, and we understood construction. Once we figured all that out, I wanted to take all my mistakes and I wanted to start teaching investors proactively “Let’s avoid this.” Basically, “I wouldn’t go through that door, unless you wanna waste $1,000. I wouldn’t go through that door unless you wanna lose and breakeven on this million dollar venture”, because I’ve been there, and I’m just telling you; you don’t have to listen to me, but I’ve been there, and it’s not going to work. School of Hard Knocks, I believe in that.

For example, I used to work with hedge funds when we first started, and they had awarded me my first three projects. I think the rehabs were around 25k a piece, so I’m like $25,000 in. I didn’t know what I was doing, so I’m paying all this money up for labor and materials, and I forget that I need to start invoicing for draws. But what happens is we weren’t following some of the protocols and materials and spec choices of this hedge funds, so they weren’t honoring draws. Hard lesson learned right there, when I’m putting out 10k/month and I’m only getting 2,5k back to run a job. Those are the mistakes I was making, and that’s very, very real and it’s still happening today.

Joe Fairless: On the flipside, what are some mistakes that you see investors make, who you’ve come across and you were like “Oh, man… Really? That happened? You thought this?” What are some of those things?

Ryan Garcilazo: The number one mistake is investors have an expectation of a rehab, when they shouldn’t have any expectation if they’ve never done it. There’s a thing called production. In construction, for the rehab you have three phases – you have phase one, which is production phase. That’s preparation, getting prepared. The analogy I like to use is the whole world is always under construction – roads, highways, buildings, bridges… There’s always something under construction everywhere you go and no matter what city you live in. Do you think that it only took them 30 days to prepare for that, or did it take them months, if not years to prepare for a project that’s gonna take 3-4 years to complete? It takes time and preparation.

The number one problem I see with investors is they’re missing the time and preparation, because they don’t know how to prepare, they don’t know what to do first. So what we teach them is “Okay, you have pre-walk, you have contract period, then you have pre-con, and then you’re set up for day one demo.” All of that has to happen. The moment you put the house under contract, if you have a 30-day holding period before you close, there’s a lot of preparation that needs to happen in those 30 days so that your contractor can effectively start the same week you close on the house.

Joe Fairless: What did you say — you said pre-walk, contract period… What else?

Ryan Garcilazo: You have pre-walk, you have contract period, and then you have pre-con, which is preconstruction period. All of that equally takes about a week to do, and then you have your couple of days — it’s like the couple days before you go to war. You’re like, “Alright, I’m ready. We’ve done our walk.”

Pre-walk is very, very important. That’s when the real estate investor walks the home with prospective GC’s. There is no scope of work in hand. You’re sharing your vision, because you’re really trying to get feedback from a good GC, who’s gonna give you feedback. A crappy GC is not gonna tell you anything; [unintelligible [00:13:37].22] “Yeah, we can do this.” I don’t like that kind of GC. Why? Because as a former GC, I engaged with all my investors.

So pre-walk is when you’re walking in, you’re sharing your vision as an investor… “Here’s what I’d like to do – I wanna knock down this dining room wall, I wanna do an open floor concept, I wanna see the kitchen from the front door. I wanna remodel the bathroom, refinish the hardwoods, a nice chandelier with some [unintelligible [00:13:57].02] on the walls.” That’s the vision. You walk pre-walk with your contractor the whole way through… However many floors it is, so be it. Multifamily – so be it.

Then at the end of that conversation you have to get three verbal commitments to get to contract period. You’re basically asking him a question in a certain way that makes it seem like you’re basically telling him. What we do is we train you to understand how long a project takes, so one of the things you’re gonna get verbal commitment-wise is you’re gonna tell him “Alright, well I put this property under contract today. It’s the 28th. I close on it 28th December. I wanna make sure you can start that week. Is that a problem?” So you see, I’m kind of asking the question, but I’m basically telling him when I want him to start.

He’s gonna say “Yes. I have a month to think about it, shouldn’t be a problem.” Boom! Verbal commitment number one is in the bag. Next verbal commitment – “I’ve been looking at this, I’m anticipating about an eight-week project. Does that sound good to you?” “You know what? Yeah. I think I can do it in about eight weeks.” “Great. I’m gonna give you ten weeks though.” You always give your contractor an extra two weeks because of inspection periods and surprises that will always happen. You’ve got verbal commitment number two right there.

And verbal commitment number three is the most important. You’re gonna tell him your budget. The idea of this is simple – you think that project is 75k. Fine. You’re gonna tell him that you need him to do it for 62.5k; you’re gonna start low. So your next verbal commitment is basically telling him, “Alright, buddy, my budget on this is 62.5k. I’m gonna get all the contract paperwork together in the next 48 hours and send that over to you.” A good GC will say “Wait a minute, I can’t do it for 62.5k. However, I could probably do it for maybe 65k-68k.” You know you’ve already got the money in the budget for it, because you leveraged him low on purpose. So you say “You know what, I’m cool with that. How about we meet in the middle? I’ll give it to you for 67k.” You already know you have the loan for 75k, so you already have a contingency within your own loan that you’re already paying interest on. That’s a win. The contractor doesn’t need to know that. That’s how you negotiate.

You’ve just left your pre-walk with no paperwork in had, with your three most important verbal commitments that you can get from a contractor. Now you go into contract period. You draft up your [unintelligible [00:15:57].15] from the conversations you had at pre-walk, you’re gonna make sure your budget is a little bit more defined so he understands what he’s making on that 67k. Then you’re gonna have your contract, you’re gonna leave a blank schedule in there for them to fill out, and then you have a blank sublist sheet; let them fill it out. If there’s gonna be subs on this job, you wanna know who they are. Send that over to them via DocuSign, give them a couple days, they send it back – great, you’ve got everything done, you can review it, and then you set up a pre-con.

Pre-con is usually a week before day one demo. Because remember, in the contract paperwork, your contractor has just supplied you basically his project timeline – a start date, how long it’s gonna take, and an end date. So you have all that. Now you say “Cool. I close on the 28th, you’re saying you can start January 1st. Cool, no problem.” So basically, you’re gonna walk the house between Christmas and New Year’s and say “I need the agent there, I need the architect there if I have an architect on the project, and I need my GC there”, because now it’s all hands on deck, and you want everybody on the team in on any changes you may have made. Maybe you or the investor have made some changes with the architect that nobody knows about. Maybe you and the agent have made some changes that nobody knows about based on comps. Now that contractor needs to know.

So everybody meets at the property, now you go up to the project one last time; it’s more detailed and thorough than pre-walk. You address any possible change orders, you renegotiate any possible financials, and you discuss all the plans of action for this, so that come week one of demo, the plan is already set in motion, baby.

That’s how you prepare for a budget, that’s how you prepare for a rehab. And I guarantee, from my personal experience, I’ve never – with the thousands of investors I’ve worked with – gone through that with an investor who’s initiated it. I have initiated it.

Joe Fairless: So that is the production stage, correct?

Ryan Garcilazo: That is correct.

Joe Fairless: Alright, what’s the next stage?

Ryan Garcilazo: Construction. The construction stage is the next most important part of this. So you want to be able to walk hand in hand with your contractor. Your contractor is gonna know more than you – and he should, unless you’re a contractor. So we have a rehab progress book that we give to our investors. It’s a book that we created with the mindset of a contractor. He knows the stages and phases he’s going to go through to get things done, so we created a rehab progress book where we tell our investors “Always walk your property twice a week minimum, more if necessary.”

Everytime you walk a property, you’re walking a property with a mission, there’s a purpose. You flip with intent; you’re not there to sit there and go “Oh, look at me… Here’s my pictures I’m putting on social media so that my network thinks I’m doing something”, because that stuff is all smoke and mirrors, and at the end of the day, when you don’t get the return you’re looking for, everybody will see that it was always smoke and mirrors from day one.

So you walk and you flip houses with an intent. Every progress walk you’re gonna go into the property and you’re gonna continue checking the schedule. Day one, week one, demo. How much is the demo gonna take? Ask your GC this. Great. We have the dumpster there. Was it there before day one? Yes. Great. How many dumpsters do you think you’re still gonna need on this project? Two. Awesome. Let me know if there’s anything I can do as an investor. Let me know if there’s anything I can do to help you so we can keep that timeline, because every stage matters.

Once demo stage is done, you go in with your project rehab book, you’re gonna go look at that and you’re gonna say “Okay, I’m gonna go through my first demo phase and I’m gonna ask questions. The dumpster – was it ordered on time? Yes/no. Was the dumpster removed on time? Yes/no. How many dumpsters were needed for this type of project? You make a note of that. And then you write down, were there any issues associated with demo? Maybe there were, maybe there weren’t. You write Yes/No.

Then there’s another little line item under the demo phase that says “Was there a draw associated with it? Yes/No. How much was the draw that was requested? How much was approved?”, because that’s always two different things. You’re gonna request $4,500, but the lender might see $2,000. That’s the nature of the business.

So you wanna document all that. If you have a lot more issues, then there’s a box, and that box is where you keep your notes. Make your notes on this demo phase. And then you go through all the different phases, as they happen. Your permits, your [unintelligible [00:19:41].15] the inspection period, then you’re framing, and then you’re setting and you’re moving… You’re going through all those different phases and it’s basically teaching an investor indirectly what phases should be coming up next, so that they’re learning, because they’re gonna go quality-check it themselves. So every time they do a project, walk their project, manage it. At the same time, they’re able to try to punch list as they go. They may have noticed a week before that that [unintelligible [00:20:03].15] or that base was cracked, and you made a note of it and you’ve told your GC, “Hey, don’t forget that that needs to get picked up and replaced. You installed it, it’s cracked, it happens, I get it. No big deal”, however, I notice a week later it’s still there. “I wanna make sure you don’t forget that.”

So basically, you’re punching as you go so that you’re minimizing all the list of things they’ve gotta do at the end of the project. You’re trying to create a win/win. You’re the investor, man. You’re in control. The agent works for you, the contractor works for you; the lender is working with you. They all wanna make money with you, so as an investor, we are empowering you, so that you understand how this process is supposed to work, and that’s the construction phase. Very, very detailed. There’s a lot of house walks, two weeks minimum, progress checks, checking your notebooks…

We also have a plan for our investors in projects that are $100,000 or over on the rehab. Go get yourself a [unintelligible [00:20:49].26] put it on the wall, drill it into the studs, and put all of your contracts, all your paperwork, all your scheduling, all your materials and [unintelligible [00:20:56].20] and pin it to this board, so that every time everybody walks the house, you have something to reference they are on the property. Because if it’s a $100,000 rehab, there are a lot of moving parts, and every construction project in the world, whether it’s a rehab, or a bridge, has a set of construction documents sitting somewhere near the project or on it. You have to have that.

Joe Fairless: With the construction stage, what would you say is the most overlooked aspect of it?

Ryan Garcilazo: The most overlooked aspect I think is putting too much trust in your contractor, simply because investors don’t know enough, so they trust that their contractor is gonna guide them to the promised land. And most do, trust me. Not all contractors are bad, let’s be honest… But they need direction. Contractors are blue collar guys, they’re simple. “Give me some directions, give me some directives, give me step-by-step, point me in the direction, crank me up and watch me go.” Without direction, they’re gonna start assuming you don’t know what you’re doing.

When I was a contractor, I used to see a lot of my clients – if not most – they simply just didn’t know what the hell they were doing, so I took it upon myself to make certain decisions. Some decisions I know they’ll like, some decisions I know they won’t like, and at the end of the day, that causes a problem of communication and transparency, because if I’m making decisions on your behalf because you can’t make them, because you don’t know how to make them, and then all of a sudden later I made a decision on tile because I knew it was cheaper and you’d like that but you hate the color, but it’s already installed, we’ve got a problem. Because now I’m gonna tell you “Take the initiative here, man. This is your house, not mine. I’ve been asking for tile selections for a month, they’re not here. I have to make a move, my guys need to get paid.”

The most common issue is putting this trust in your contractor because you as an investor don’t know what to do next. We kind of help you with that, obviously.

Joe Fairless: And is there a stage after the construction stage?

Ryan Garcilazo: Yeah, post-construction. Post-construction is when you wanna make sure you work with your contractor to honor a warrantee for a year, you wanna make sure that they’ve got all their final lien waivers signed, you wanna make sure you have your sub-lien waivers signed, you wanna make sure the punch list has been complete once or twice and that is signed, and then obviously I need final inspections to be done with the city’s [unintelligible [00:22:54].23] Make sure they come to the final inspection, sign up on that, that you have everything you need. Because once you have something going on and you have a buyer that’s interested, they’re naturally gonna call their buyer inspector, and the buyer inspectors, let’s be honest, some inspectors are paid to find problems, that’s what they’re supposed to do. I’ve never heard of an inspector coming out and saying “Nope, the house is perfect.” No such thing. So you wanna be prepared with your contractor.

A smart investor will hold back $500. The reason why you wanna do that is because you wanna be able to get your contractor back to the job site if there are some issues that an inspector finds. Now, at the same time, the inspector may find something pretty big, that has nothing to do with the original scope of work. That comes down to your relationship with your contractor.

In Chicago, we have a lot of power lines that go from the power poles from the alleys to the back of the houses. They actually are still connected to the houses. Well, now what they want contractors to do is if you’re doing a full renovation, they want you to bury that line, and that has nothing to do really with the city; it’s everything to do with the electric company. For us it’s ComEd. ComEd wants $1,000 for you to bury that line. Guess what? That wasn’t part of the scope of work. Most contractors don’t know that. The cities can do whatever the cities want. All of a sudden that’s an out of expense budget and that’s $1,000 and that the investor has to pay, and the reality is you’re probably not paying your contractor to do that. You’ve gotta pay the city to do that. Different story. Those are common scenarios.

Other common scenarios are they don’t like the way the water is draining. Maybe they might add six-foot extensions on the down spots, so that the water drains away from the house. Little stupid annoying things are very common, and most investors who are seasoned, they try to be proactive about that. But again, a home inspector’s job to find things.

Joe Fairless: And I assume – but maybe I shouldn’t – that that’s the last part of the process. You’ve got the production stage, the construction stage and the post-construction stage. Is that the final one?

Ryan Garcilazo: Those are the three main stages of a rehab.

Joe Fairless: Okay.

Ryan Garcilazo: Naturally, there’s a hell of a lot more that goes on, of course, and I’ve spoken about them.

Joe Fairless: Yeah. Well, what is your best advice ever for real estate investors as it relates to your area of expertise?

Ryan Garcilazo: My opinion is simply this – there are a lot of programs out there that are excellent. You have Fortune Builders, you’ve got the Homevestors Franchises, Rich Dad, Poor Dad, [unintelligible [00:25:01].04] You have a lot of programs out there that are teaching you how to real estate invest. All those programs are good, because you have to learn something.

My recommendation is you call a company like ours, but then again, there is no company like ours, so you call The Rehab Depot, because if you want to spend a little bit of money upfront to help you, it’s way better than losing tens of thousands later, and then that whole thing of “I told you so.” The reason why I suggest this is because we lived it.

I’ll go out and I have a lot of clients that listen to this podcast, and I have a lot of past clients I have a great relationship with who also listen to this podcast… My point is this – they’re probably not gonna like the fact that I say this, but I’ll say easily 90% of my clients over the past decade never reached the return they wanted because they didn’t know how to rehab. Don’t be that person.

If you’re new, or even if you’re a veteran and you’re still not getting the returns you’re looking for, come learn how to rehab. We have online courses, and we have Skype courses, and we also are working in different markets. Give us the call so we can help you walk through the process, man.

Joe Fairless: Cool. Are you ready for the Best Ever Lightning Round?

Ryan Garcilazo: Let’s do it, man. Let’s do it.

Joe Fairless: First, a quick word from our Best Ever partners.

Break:[00:26:06].10] to [00:26:55].05]

Joe Fairless: Alright, best ever book you’ve read?

Ryan Garcilazo: Extreme Ownership.

Joe Fairless: Best ever deal you’ve done personally, and not your first, not your last, but somewhere in between.

Ryan Garcilazo: I made 130k off of one flip.

Joe Fairless: What’s a mistake you’ve made on a transaction that you haven’t talked about already?

Ryan Garcilazo: I under-bid a job grossly and came out of pocket to finish it.

Joe Fairless: Best ever way you like to give back?

Ryan Garcilazo: Oh, I do a $1,000 giveaway every Christmas. I walk around with a hundred dollars and I just randomly hand it out to people on the street.

Joe Fairless: And where will you be during Christm– no, I’m kidding. What’s the best ever way the Best Ever listeners can get in touch with you? …which you’ve mentioned, but feel free to repeat it.

Ryan Garcilazo: My phone number is simple – 847 899 5713. You can find me on social media under my name… Two names – The Rehab Depo and Ryan Garcilazo. And obviously, on my web page, www.thegarcilazogroup.com. Reach out to us, let’s get you in the program and learn to flip, baby. That’s what we’re here for.

Joe Fairless: Well, thank you for being on the show, talking about, from a GC standpoint, how to see the flip through the eyes of a contractor versus the eyes of an investor, and the three phases in the rehab process – the production phase, the construction phase and the post-construction phase.

In the production phase make sure that we identify and get the start date, the length of time that it will take in the budget, and you talked through…

Ryan Garcilazo: The biggest thing, brother, is the three verbal commitments, man. Just remember that somehow, some way, you need to learn how to get the three verbal commitments… But first, we get the property under contract.

Joe Fairless: And I’m glad that you talked through how to actually have that conversation with them, where you kind of did a role-play and went through that process… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Ryan Garcilazo: Thank you, guys. I appreciate it. I look forward to working with anybody and everybody. Have a good day.

A physician turned serial entrepreneur. Buck invests his extra cash in many different areas, and helps other high income earners do the same. From real estate to buying internet businesses, he’ll invest in whatever offers good returns. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Fund That Flip provides short-term fix and flip loans to experienced investors. If you’re looking for a reliable funding partner, their online platform makes the entire process super easy, and they can get you funded in as few as 7 days.

They’ve also partnered with best-selling author, J Scott to provide Bestever listeners a free chapter from his new book on negotiating real estate. If you’d like to improve your bestever negotiating skills, visitwww.fundthatflip.com/besteverto download your free negotiating guide today.

TRANSCRIPTIONS

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff. With us today, Buck Joffrey. How are you doing, Buck?

Buck Joffrey: I’m doing good. How are you, Joe?

Joe Fairless: I am doing really well, and I say your first name is the most fun first name I’ve pronounced in a while.

Buck Joffrey: Oh, good!

Joe Fairless: Buck, in addition to having a very cool first name, is also the host of the Wealth Formula Podcast. He is an accomplished physician turned entrepreneur and asset manager; he built an eight-figure net worth by teaching the principles of wealth and building through his website and his podcast. He is the best-selling author of Seven Secrets Of Eternal Wealth and he’s based in Chicago, Illinois. With that being said, Buck, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Buck Joffrey: Yeah, sure. As you mentioned, I actually am a physician and I finished my training in 2008/2009. I got inspired a little bit by Kiyosaki’s Cashflow Quadrant and then instead of kind of going the direction of all my colleagues, I went into business for myself. When I say business, I mean real business; I pulled myself out of this medical practice after a few years and then started a couple other businesses, and just became a serial entrepreneur.

I started making a fair amount of money doing that, and I had to figure out how I was gonna invest it. My dad’s a scrappy real estate entrepreneur, he has been for 50 years, and then I’m reading Kiyosaki, and before you know it, I become a real estate guy, too.

Buck Joffrey: I’ve started multiple companies; my first company was a cosmetic surgery business, and that’s still in existence, completely hands off. I’m literally moving away… I have another business in the allergy and sinus arena, I have another behavioral therapy business, I have multiple real estate assets and I’m managing some assets… What else? I’ve got internet assets, cashflowing internet sites, and the thing that I spend the most time with is my podcast and my educational platform, which I really don’t make very much money on at all, but it’s what I like doing, and when you make enough money, you can do whatever the hell you want.

Joe Fairless: With your real estate businesses, do you syndicate deals? We talked a little bit before we started recording – you said you syndicate?

Buck Joffrey: Basically, I started out buying multifamily smaller apartment buildings just on my own and had some success, and I had people asking to invest alongside me, so I effectively made a decision that “Well, let’s just do this. If they wanna invest alongside me, let’s just start doing larger assets and getting people involved.” That was the decision to make, and now it’s a little bit of a tough market; I don’t know what your experience has been, but we’re sort of at the top of the cycle, so it’s not like there’s a lot of deals going on.

There’s other things that I’m doing… Obviously, you’ve probably heard of Lee’s opportunity with the real estate guys, so I’m one of the sponsors on that, and also I’ve got a life settlement fund… I’m asset-agnostic; I love real estate, but I’m not gonna go and buy something just because I love real estate. It has to make sense.

Joe Fairless: What’s a life settlement fund?

Buck Joffrey: Whole life insurance policies. This is kind of a crazy; people buy these whole life insurance policies and most of the time they shouldn’t, although there’s exceptions to that, obviously. What happens is they pay for them for 20, 30, 40 years and the next thing you know they’re 80 years old and they can’t afford the premium anymore, because they’re expensive. So in an insurance policy you typically have the cash value in addition to the insurance with the whole life insurance policy. That’s usually not very much compared to the death benefit.

Say somebody’s 82 and they need some money, they don’t know what to do because they can’t pay for their insurance policy anymore, and they’ve got a cash value of, say, $100,000 sitting in that account. So they could turn it in to the insurance company and say “Okay, just give me my $100,000 back, even though I’ve put several hundred thousand dollars over the years”, or they could turn to a broker in life settlements and they could say “Hey, I’ll tell you what–” the broker will say “I’ll pay you five times your face value instead of that 100k, and all you have to do is sign over the insurance policy to us, and we’ll just wait for the rest of your life. You enjoy the money, and when you die, we get the death benefit.”

It sounds morbid on the surface, but I think if you look at it from the perspective of the people we’re buying from, they’re either gonna let these things expire and get nothing, get a fraction of something that’s really not nearly as much as they’ve put in, or they get 4-5 times as much as they ordinarily would.

Joe Fairless: You’ve got a lot of different ventures… Looking at your entire revenue across the board, what are the percentages of each of the revenue buckets?

Joe Fairless: Just in total – money coming into Buck Joffrey’s portfolio.

Buck Joffrey: Well, my businesses tend to be pretty high revenue, so I would say still 80% of yearly income does still tend to be from these businesses – the cosmetic, or sinus, or behavioral therapy businesses, and the internet assets. So in terms of real estate, I’d say probably maybe 15% I would say is from real estate. But the way I view real estate as an investment vehicle, and it’s something I’ve grown up with and I understand it, but the way I make my money on a day-to-day basis is as an entrepreneur. So I think of real estate as where I’m gonna put high-velocity income into, to grow it, and turn paper money into a tangible asset. That’s basically what I see it as.

Joe Fairless: With the multifamily deals that you syndicated, how many purchases have you done with multifamilies?

Buck Joffrey: Well, with multifamily I’m just getting in the game now. I’ve syndicated at least two or three different types of things, but in terms of multifamily, it’s not something that I’ve done a lot of yet. I own about seven or eight apartment buildings right now, a medical building and so on and so forth, so from the standpoint of taking investors along, it’s relatively new to me.

Joe Fairless: It’s funny, seven to eight would probably seem like a lot to most people, myself included, but you said you “only” own seven or eight… Now, only meaning you personally, or you with investors?

Buck Joffrey: I own seven or eight apartment buildings myself. My point was that — I think, Joe, that your thing is you’re the syndicator person, right? That’s what you do. Syndication for me is opportunistic and it’s like, if you thought of a guy who was buying an apartment building as an investment – that’s what I used to do before I started looking at the syndication path, and now what I look at is “Well, if there’s a large asset that we wanna acquire, I can put in the same amount of money and then investors can put in money alongside me and we can make that happen.” So I think it’s just a different way of approaching it.

Joe Fairless: Well, it’s the same way; I put my money into every deal as well, but what I was asking was just the apartment buildings – so you personally own 7-8 yourself, and then you have a medical building, and then how many on top of that have you syndicated?

Buck Joffrey: Well, I’ve syndicated two deals.

Joe Fairless: Okay, so 7-8 apartment buildings… Let’s talk about those. What was the first one that you bought?

Buck Joffrey: The first one unfortunately wasn’t a very good one. That’s where I learned from. I bought a 14-unit apartment unit on the Southern suburbs of Chicago, and basically I did everything wrong. At looked at just the numbers; it was a class D apartment building. I didn’t find good management first, and I basically just kind of looked at the numbers and I didn’t do a lot of the homework that I probably should have. I got into this thing, realized pretty quickly that some of the numbers were cooked a little bit from the previous owner because he owned a number of properties in the area and he was essentially stuffing the rent roll… And then in terms of management, I just couldn’t find a good property manager to be able to handle it, so I basically took a big loss on it. That was my first property, and it’s one of those things I guess — as an entrepreneur I’ve taken some losses, and I always see them as opportunities to learn something. There was a lot of learning there.

Joe Fairless: Absolutely. I’ve certainly learned the most on my first apartment building deal. So that one you don’t have anymore… Let’s talk about the first one that you did that’s still in your portfolio.

Buck Joffrey: I got one in 2011. I remember I finished my training in 2008-2009, so I didn’t have any money until around 2010-2011 to invest. So in 2011 I bought this building, and I got lucky on this — part of this is a theme that keeps coming up in my life, which is sort of a network-based investing. I’m around a lot of people who were in the business and who know I’ve got money to invest and sometimes things fall on my lap, and that’s what happened.

There was somebody who had rolled up a big portfolio loan, and they needed to get out, so I got a pretty sizeable discount. The cap rate to that area already were probably about 7,5% or so, and I ended up getting the sale at 9,5%-10% cap. And that particular property in that area, because it’s in a really hot area in Chicago, the equity probably doubled, because of the fact that the cap rates – and this has nothing to do with me, it’s dumb walk… We’re at top of the market right now, and it’s probably about right around six in that area… So that’s the first one.

Joe Fairless: And with the 22-unit, knowing that the cap rates are at 6% and you bought it around 9,5%, are you doing anything with that to capture that equity, or you just let it ride?

Buck Joffrey: I’ve kind of gone back and forth on that. I have this five-year one, but it’s [unintelligible [00:11:03].00] and then I just had refinanced it I think in ’15, or something like that… But what happened was that I didn’t really know which way the market was gonna go, and sometimes when a property is doing so well – you know how this goes, it’s like… If I sell this thing, we’re gonna find something that is going to do this well. I mean, this thing was an absolute cash cow. So honestly, I’d like to hold on to things. If things are performing well, I like to hold on to them.

I’m not generally the guy who — obviously, when you have [unintelligible [00:11:34].18] five-year disposition etc, I’m not the guy who’s always really excited about the five-year disposition if something’s working really well.

Joe Fairless: Do you own seven or eight apartment buildings? Just so I’m clear.

Buck Joffrey: Well, I own seven apartment buildings and one medical building.

Joe Fairless: Okay. Of the seven, which one has been your favorite?

Buck Joffrey: That first one I’ve just mentioned. It’s in one of these areas in Chicago that’s getting super hot, and again, I had no way of knowing that… It was an area that I think it was sort of a hipster area before, and now it’s becoming very yuppie, so it’s sort of the gift that keeps on giving.

Joe Fairless: And for people who are familiar with Chicago, what area of Chicago is that?

Buck Joffrey: It’s called Pilsen area.

Joe Fairless: Pilsen. And the medical building – clearly, that makes sense. Are you a tenant in your medical building?

Buck Joffrey: Yeah, one of my practices is in that building.

Joe Fairless: Got it. You’ve got a lot of things going on – how do you prioritize your day?

Buck Joffrey: Honestly, for about a half hour before I was talking to you I was playing with my two-year-old. It really comes down to — I treat everything like a business, and I’ve got management, and I’ve got a COO who’s just phenomenal, I’ve got a great marketing team… So literally, I’m moving to Santa Barbara in August. The point that I’m trying to make is that I’m very lucky in that I have a team and I’ve approached this from day one as a business; everything I’ve done is a business and I try as much as possible to be very high-level and direct the action.

Probably the thing that I spend most time on in general for my business is marketing in a high-level direction.

Joe Fairless: What has been a recent shift or big decision that you’ve had on the high-level direction of your business?

Buck Joffrey: I think the idea of starting to get more involved with investors has been a major decision for me. I take that very — as I’m sure you do, I take it very seriously. It was something that I’ve had to think about a lot, because I’ve done well for myself, and I don’t really need people’s money to do this… So the question for me was “Do I really wanna take on that responsibility to start syndicating and raising money for things?” For me, it was just — I think it’s an opportunity too in a way to give back; as you know, I’m a physician and my audience tends to be not necessarily physicians, but certainly highly educated professionals. We’re also the ones who are constantly getting screwed, right? When people see doctors, they know that they make a lot of money, and it’s like a shark tank – everybody goes around them, they want to screw them over. So that was the reason I wanted to get in the game, because I wanted to try to be somebody that people can trust.

Joe Fairless: What is your best real estate investing advice ever?

Buck Joffrey: I think for me the biggest thing – this is just basic, but I think the most important thing is property management. For me, I truly believe that. I know people who have made a career out of syndication just because they found a great property manager, and that they feel comfortable that every time they get a property, the property manager can give them real information in terms of understanding what those real expenses are, what market rents are, and things like that; you can really rely on that.

I think it’s probably in my view the biggest thing that people should look at. In fact, I talk to people in my group, this investor club – it’s not just about putting together deals, but even just advice on “What should I do? I’m looking at this… I wanna go to another market, because I live in New York City.” My advice is always “Okay, well don’t look at properties first, go meet property managers first. Pick the market for a reason, then spend a lot of time interviewing property managers.” For me, that’s do or die, and it’s the same thing for all my businesses; without good management, you’re pretty much screwed.

Joe Fairless: I agree. Without good management, that is one thing that you are definitely gonna be in trouble with. Are you ready for the Best Ever Lightning Round?

Buck Joffrey: Sure.

Joe Fairless: Alright. Well, with some trepidation, we shall continue. First, a quick word from our Best Ever partners.

Break:[00:15:44].12] to [00:16:45].21]

Joe Fairless: Best ever book you’ve read?

Buck Joffrey: The most influential would be Cashflow Quadrant.

Joe Fairless: Best ever deal you’ve done that you haven’t talked about already?

Buck Joffrey: It was not a real estate deal. I’ve taken internet businesses, bought them for pennies on the dollar and turned them into six-figure businesses.

Joe Fairless: What’s the key to turning a pennies on the dollar internet business to six figures?

Buck Joffrey: Having a great marketing and internet team.

Joe Fairless: What’s a mistake you’ve made on a transaction that you haven’t mentioned already?

Buck Joffrey: Well, a transaction means — could I be on the buy side, too?

Joe Fairless: Yeah. Do whatever, yeah.

Buck Joffrey: I think the biggest mistake I made – and this seems crazy, but I just trusted too much. When I was trying to learn syndication, I joined up with a guy who was supposed to be some kind of syndication guru, and I’ve realized he was just a crook, and the only thing he cared about was fees. I had to get out of that, but I lost money, because I had to invest with him.

Joe Fairless: What is the best ever way you like to give back from a business standpoint or just day to day?

Buck Joffrey: Well, I think with my podcast I’m giving back, since I don’t really make much money doing it. And I would say that that’s my mission right now – education for high-paid professionals. It’s definitely my least profitable business, so I would say that’s pretty much giving back.

Joe Fairless: And how can the Best Ever listeners get in touch with you and listen to the podcast or learn more about you?

Buck Joffrey: WealthFormula.com, you can go there. Lots of resources on there. Actually, you mentioned my book, Seven Secrets of Eternal Wealth. It was on Amazon, it was a number one bestseller, and then I took it off and I just put it on for free on the website as a download (pdf), so you can grab that if you want. It’s a good one to send to especially people who don’t listen to your show, because it basically talks about a lot of the paradigms that you and I already agree on, and your audience already agrees on… But we’ve got to keep people from dying broke.

There’s also a whole bunch of other downloads on that, so WealthFormula.com, and the podcast is Wealth Formula Podcast.

Joe Fairless: Well, thank you, Buck, for being on the show. Best Ever listeners, WealthFormula.com is in the show notes, and since you agree with us on the approach, go find a friend and tell them about the book too, so they can go grab that book.

Buck Joffrey: Buck, thanks for talking about your approach from a macro level, and how you build your wealth, and then touching on and talking about some specific real estate deals. The 14 units that went the opposite direction that you wanted, but it was your first one… And the lessons learned along the way in terms of the management company and just looking at the numbers, and a seller cooking the books a little bit, so the due diligence that I’m sure you do on future properties… As well as the 22-unit that went incredibly well and still is going incredibly well, and the area that you got it in, as well as the connections that you had to find out about the opportunity.
Then overall how you approach your business and the venture that you have, how you prioritize your focus, the high-level direction and the marketing, and then your recent decision to do the syndication route.

Thanks for being on the show. I hope you have a best ever day, Buck, and we’ll talk to you soon!

If you think you’re in a tough spot, listen to Jorge’s story, or even better, read about it in his book Burn Zones. He lost it all and made a company inspired from that loss. American Homeowner Preservation buys distressed and non-performing notes, and works with the families to either stay in their homes, or get out from under them without foreclosure. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Jorge Newbery:
-Founder and CEO of American Homeowner Preservation LLC
-Utilizes Regulation A+ to crowdfund the purchase of nonperforming mortgages from banks at big discounts
-Accepts both accredited and non-accredited investors, and the minimum investment is just $100
-After natural disaster in ‘04 left him $26M in debt and now helps others to rebuild after unaffordable debt
-Regular contributor to Huffington Post and Author of Burn Zones and Debt Cleanse
-Based in Chicago, Illinois
-Say hi to him at www.ahpfund.com
-Best Ever Book: Fierce Conversations

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Jorge Newberry. How are you doing, my friend?

Jorge Newbery: Good, good. Thanks for having me, Joe.

Joe Fairless: My pleasure, nice to have you on the show. You are an interview guest by request. One of my investors/loyal listeners – he was like “Jorge Newberry is doing some amazing things and you should interview him”, and I was like “Okay, I will.” You’ve actually been on the show before, in a roundtable, probably two and a half years ago, and I’m looking forward to having a focused conversation with you.

A little bit about Jorge – he is the founder and CEO of American Homeowner Preservation. He utilizes Regulation A+ to crowdfund the purchase of non-performing mortgages from banks at big discounts. He is based in Chicago, Illinois, and you can say hi to him at his company website, AHPFund.com. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jorge Newbery: Sure. My background is I’ve been in real estate for 27 years. I started out working for a mortgage company; within a couple years I started my own mortgage company and I progressed into buying properties. I eventually built a portfolio of over 4,000 apartments across the country, and then an eye storm hit my biggest complex, which was 1,100 units, and it kind of triggered a freak series of events, which ended up with me losing everything and actually being 26 million dollars in debt, which I could not pay.

So it was going from tens of millions in net worth, 4,000 apartments, to essentially nothing, and even a negative. It was a humbling situation, but I tried to make the best of it by starting this company, which is American Homeowner Preservation. What we do is we purchase pools of defaulted mortgages from banks and hedge funds, and then we try to use my experience as a debtor overwhelmed with debt to craft novel strategies to reach out to these homeowners and achieve consensual solutions expeditiously, which do two things – we deliver financially transformative solutions to the families, as well as generate extraordinary returns financially for our investors. So it sounds cliché, but it’s a win/win/win, all around. The only loser, you could argue, is the bank or the hedge fund, but we’re basically paying what they would sell these loans for anyway. We’re executing strategies that recover faster than most of the other firms in this space.

Joe Fairless: I wanna focus the majority of our time on the American Homeowner Preservation company, but clearly, I have to ask about the eye storm, just to close the loop on that. An eye storm hits over a thousand of your units, that triggered a series of events where you lost everything… Will you elaborate?

Jorge Newbery: Sure. So one thing I didn’t know was that if you have a really large insurance claim, the insurance companies will do everything they can to not pay it. In fact, in this case we had to go to court to get them to pay extraordinary damages at this property. It took a lawsuit and 11 months before they settled, and when you have 1,100 units, with many home units that were barely habitable as a result of the storm (or inhabitable), resulted in the city taking action against me to try to evacuate the property and whatnot. I got a temporary restraining order against the city…

We ended up in a high profile public battle which ended up very negative. But to prevent that, first I’d started borrowing on all my buildings that were doing well. I took loans on those to try to do the rehab, but I just couldn’t borrow enough, there was so much damage. And just to give you an indication, in the end I settled for 32 million dollars, so a huge amount of money [unintelligible [00:05:07].13] “That’s great, congratulations!”, but no, it’s really the opposite, because the damages were over 45 million dollars, and I had exhausted all my resources. When I finally got the 32 million I paid back some of the contractors and what not, and even then it wasn’t enough.

By that point I was in a battle with the city, and – cliché to say, you can’t fight the city hall, and really I couldn’t. I used a lot of resources legally against the insurance company, then against the city, and in the end I lost. The city owns the property today. The city wanted the property, they got the property, and it was such a crazy series of events…

There’s a political theater. Once in a while you hear about somebody who’s just taking a beating in the press, and you’re thinking “What happened here?” In this case it was me. I was actually arrested, and it was pure political theater; I had no criminal record, but they arrested me, and it was front page in the media there, and it was all this kind of exercise to eventually get the property.

So the city owns the property today, it’s the largest property in the city of Columbus, and it was so crazy that I eventually wrote a book about it, because I couldn’t keep explaining… It’s a book called Burn Zones, which I should get you a copy, Joe. Actually, if any of your listeners want it, just let me know. Send me an e-mail and I’ll send you a free copy, a signed copy even.

It tells the story of how I made millions and how I lost millions, and now the burst of American Homeowner Preservation.

Joe Fairless: Wow. Is it available on Amazon as well?

Jorge Newbery: Absolutely.

Joe Fairless: Okay, I’m just gonna buy it on Amazon, I’ll do that. So one final question I do have to ask – 45 million dollars from an eye storm? What happened?!

Jorge Newbery: So here’s what happened – so you have three-story buildings… We had 122 three-story buildings. The eye storm knocked out power to 40% of the city, including all of our units, and temperatures were -8. So what happened is the power goes out, then the boilers that pump — we had radiant heat, so the boilers that pumped the hot water through all the units to keep them warm, power goes down, water stops pumping. And -8. So all the water that was in those pipes froze and then burst once it started heating up again, and then all the domestic water froze and also burst.

We had 1,100 units which had no electric and no water. There were thousands of families living there. The Red Cross even opened up a shelter across the street. It was the largest federally declared disaster in Ohio history, and we were probably one of the largest single point of damage. So it was a challenging situation, and we called in a international disaster remediation company that was recommended, and [unintelligible [00:07:49].27] they ended up running huge bills. They had hundreds of people there every day, they were pumping water out of the basement, they were trying to dry the units, they were providing temporary power, we had the power trucked in, because we were out of power for four days, and we had power trucked in from all over the North-East, these big generators. It was a disaster area, so almost half of that money went for mitigation.

In fairness, I kind of trusted them, and they kind of ran out of control in terms of running up these bills, and [unintelligible [00:08:18].12] because it was just so much money.

I was naive, I had never been in a situation like that. That was close to 20, and then the rebuilding was just a huge ordeal, 1,100 units. You divide 25 million by 1,100 units and then you start seeing “Well, actually, per unit it’s 22k”, and everything had mold, so they had to take it down… It was a really bad situation, let’s just say.

In the end, the property was demolished; the city owns it, it’s 54 acres. They have a high school on a part of it, and they’re doing some other development on it. The problem was it was a lower income property in one of the highest income areas of Columbus, so they really saw it as an opportunity to get rid of the tenants at this property, and that’s what happened. It’s all in the book.

Joe Fairless: I just purchased it. Burn Zones: Playing Life’s Bad Hands. I just bought it on Amazon. It’s arriving in two days from now, and I will read it probably in 24 hours. This is fascinating. Thank you for sharing your story about that, by the way, because there’s a lot of lessons learned, but then also perspective, because hey, this tremendous thing happened to you, and you’re still living and breathing and talking about it, and you’ve overcome it now. You’ve got American Homeowner Preservation, so now let’s focus on that.

Basically, from how I heard you describe it, you’re basically buying distressed notes and then trying to make them perform again – is that basically what you’re doing?

Jorge Newberry: That is exactly right. We make them perform again, or find some other resolution, preferably consensual, that resolves that note. So we reach out to the family and we give them three options. Number one, “If you wanna stay, here’s what your new payment will be.”

Let me give you an example. Someone owes $100,000. Maybe they bought the home 10 years ago, at the height of the last bubble. Then the property value dropped, so now it’s worth 50k. We can probably buy that loan for around 15k-20k. Now, with that kind of discount, we can go to that family and say “Hey, your old payment was $800. We can drop it to $500. You haven’t paid in three years (which is really common), so you owe $20,000 in delinquent payment. Give us $2,000 and we’ll forgive the difference.” If they wanna stay, if that’s a great deal for them, that’s what they’ll do. If they don’t wanna stay, we say “Hey, we’ll give you $1,000, we’ll forgive the loan, and then we’ll get a deed in lieu, and we will sell the property to a third-party.

The final one is “If you wanna do a lump sum settlement, you owe 100k, it’s worth 50k – we’ll take 45k and forgive the difference and release the mortgage.”

Most of the people do the first two – they wanna stay, they’ll do a modification. If they don’t wanna stay, they’ll do a deed in lieu and take the cash. And we’re indifferent, we don’t push — I think a lot of people get in trouble in this business because they come in saying “Hey, I need to do one of two things. I wanna get everyone to reperform. I wanna get everybody to get kicked out of their home and sell the REO”, and you can’t really mandate to the families.

I think how we’re so successful is two ways. How we separate ourselves from the pack is that we’re indifferent. We’ll give them the options, the numbers are there, and the numbers are all formulaic. If a home is worth $50,000, then if it’s in California [unintelligible [00:11:35].17] or Kansas, everybody is gonna get the same terms.

The first day we talk to the family we’re gonna give them “Here are the real numbers in terms of what you can do, and if you wanna go ahead, you’ll have the document the next day. It’s going to go very fast. And if you’re leaving, then we’ll have a mobile notary there within a couple days with a check you signed, you get the check and it’s done.”

We try to make it very fast, very easy, and that’s what really works. It’s not aggressive, it’s not trying to squeeze the most money you can out of them; we just try and buy a lot of loans, run them through the formula and try to make it work.

Joe Fairless: I’ve got the first two written down… I was trying to capture the third solution that you offer – what was it again?

Jorge Newberry: The third one is a lump sum settlement. Sometimes someone owes 100k and the house is worth 50k. We’ll say “Hey, we’ll take 45k”, and once in a while, people between and friends and family members they cobble together the cash, or they have maybe an adult child who wasn’t on the original loan, and can now qualify for new financing to buy the home from their parents, as an example.

In today’s low rates, it’s gotta be a fantastic deal – the family stays in the home, the adult child lives there, and that has worked out really well in those circumstances online. This is all a result of — when I had 26 million dollars in debt, creditors would come to me and they’d do one of two things. I said, “Hey, I wanna work out a payment plan.” They would send me an application, I’d have to send all these documents back, tax returns, paycheck stubs and what not, and they determine based on that what they could squeeze out of me, and they’d try to get the highest payment possible that they thought I could afford without making it unaffordable. It was also a long back-and-forth.

When somebody would say “Hey, you owe us a million bucks. We know you don’t have it, but you can come up with 100k and we’ll forgive the difference.” Someone came to me with that deal. Okay, well now I know kind of what I’m working with, so let me see if I can find a way to make that work. Based on those lessons – that’s what we do here. I give them the numbers and they say “We’re going.” Sometimes people say “Hey, that payment works for me, I’ll do it”, and sometimes they say “Hey, that payment is much cheaper; I could really easily afford that. I really could afford twice.” I don’t want the extra money; save it, because the 500 is gonna make us a great return, so we’re happy with it.

So we’re trying to make it super simple, super transparent, and I think that’s what’s really working for us.

Joe Fairless: So it’s not based on their financial circumstances, it’s strictly based on what numbers make sense for you based on the acquisition price that you have.

Jorge Newberry: Yeah, which is a factor of the value of the property. Everything is a formula based on the value of the property. It’s always going to be something that the family will almost look at as being too good to be true. But despite that, it’s still gonna generate pretty extraordinary returns for us and our investors.

Joe Fairless: A big piece of the puzzle is getting the enough equity on the front-end in order to have the negotiating leeway to make it a win/win for everyone involved.

Jorge Newberry: You’re absolutely right. We make our money when we buy the loan. If we pay too much, that’s going to negatively impact our returns. If we buy right, then we made our money, we just now have to execute the strategies.

Joe Fairless: Is that your biggest challenge in this business, to get enough deals or loans that have the value there?

Jorge Newberry: At this very moment the answer is yes. The market is very heated. Just like the real estate market, it’s gotten very hot; so is the non-performing note market. There’s a lot of competition and that’s driven the prices up, so what we’ve ended up doing, and we’ve been fortunate so far this year – we have found some decent-sized pools where there’ve been a lot of extraordinary circumstances which has made it so we’ve been able to buy them without much competition, and we bought 1,300 loans in the last 90 days, which is probably double what we bought last year, and we bought them extremely cheap.

One was from a bankrupt lender, they were a bankruptcy trustee sale, and the other was the court ordered sale. That’s going to keep us busy all year, and we bought those exceptionally well. Our returns last year was 39.7%, and that’s based on an audit that’s filed with the SEC. This year we’re shooting to do even better.

Joe Fairless: Are you market-specific or does it not matter? My question was gonna be “How do you pick the market?” but does it not matter to you?

Jorge Newberry: It doesn’t matter to us, and that’s why I think sellers like us, because we’ll buy everywhere. If they have a loan — we bought in every state of the union except for Wyoming and North Dakota, and hopefully we will buy there eventually. We bought in Alaska, in Hawaii, and even in Puerto Rico. So a lender can come to us and say — the last pool was 799 loans; they can come to us and say “Hey, here are 799 loans scattered (they were in 39 different states, plus Puerto Rico) and we want you to buy them all.” For lenders lots of times it’s a hassle when people say “Oh, just give me California” or “Just give me New York.” Once they decided to sell, they wanna sell everything, and it’s much easier to just do one sale to one buyer. So we really fill that niche.

Even if the loan is some kind of crazy litigation situation or the property has been demolished by the city, we’ll still buy that loan. We may pay a dollar for it, which we buy a lot of loans for one dollar, but we’re gonna move it off their servicing platform and onto hours, and it’s gone. So we’ll buy every single loan they have. That gives us a considerable advantage over a lot of other lenders who maybe don’t have the flexibility to take on some of the stuff we do.

Joe Fairless: I understand the business model for how the overall operation makes money. You have investors who invest alongside in these opportunities, correct?

Jorge Newberry: Correct.

Joe Fairless: Okay, so how does your company make money? What fees do you charge?

Jorge Newberry: Sure. We charge a 2% annual management fee, which really basically offsets operations. Our big money is on the back-end. Here’s how the revenue flows – first, each month’s expenses are paid, management fees paid, and then we pay the first 12% to investors, basically 1%/month. Any extra money is used to buy more mortgages. The fund’s always five years, so the first 2-3 years of the fund we’ll reinvest in additional mortgages, but sometime in the third year we’ll stop doing that, and over the second half of the fund, each month the investors will receive their 1% on their outstanding investment, plus any extra money we’ll return it to them with the goal that at the end of the 5th year all investors have received their 12% plus all their capital back. Whatever is left is ours.

If we continue to do 39%, then that pie at the end will be pretty significant, and all our investors are paid back, they’re happy they have their 12%, so everyone — cliché, once again, but win/win/win, everybody’s happy. But ours is back-loaded. I don’t like Wall-Street where lots of times some of their compensation is front-loaded. We wanna earn the money, give them back their money, and if we do that and there’s a big reward and if there’s some big disruption which for whatever reason our returns sink, then we still wanna give the investors back their money and their returns, and then we just end up with a shrunken pie at the end.

Joe Fairless: Based on your experience in over 27 years of real estate, what is your best real estate investing advice ever?

Jorge Newberry: Be patient. The markets are cyclical. Never believe that you’re in a market like today, that this is going to be sustainable. At this moment in time right now there’s a lot of people who feel the money is easy, they feel compelled to buy properties or buy notes, and they lose a little bit of discipline. Then the market cycle goes the other direction, and all of a sudden they’re like “What happened? What happened?” and they’re trying to cut their losses or what not.

Right now we’re not competing in bids, and I’m okay on the sidelines more or less, and I’ll be there for the next six months or the next year, just buying opportunistically, and if that means I don’t buy that much, that’s fine. Because when there’s disruption in the market, that’s when I wanna be liquid, that’s when I wanna be nimble, and that’s where all the opportunities present themselves.

This isn’t a business where you have to do a deal a month or 20 deals. If you can do a deal that just makes a lot of money and you maximize the return on that, look for those opportunities and be ready. In any kind of competition or any kind of game, you wait, wait, wait, and when the opportunity is there, you run and you take it. But you can’t try to say “Hey, this year I’m gonna put out 50 million dollars, because I don’t know if I’m gonna have the opportunities to do so. So be patient, and when the opportunity is there and the market is disrupted and everybody is running one direction, that’s the time you wanna have the capital to be running the other direction, against the crowd, buying when everyone is selling… So I’m looking forward to that.

I think the market is still hot right now, but that downward portion of the cycle isn’t far off, and that should be a great time. I think we’ve set ourselves up. We raise money online – $100 minimum investment, you can invest in a couple of minutes. So we’ve really streamlined it [unintelligible [00:20:31].28] we have some good technology… I think we’re really primed for when this disruption happens that we can really turn this up and expand significantly. Anyone out there, that’s what I would do. It’s not just specific to this portion of the cycle… Just be there. Don’t feel you have to buy. Be disciplined, know what your strategy is, and when the opportunities present themselves, get them.

People always get bogged down with a whole bunch of stuff where there’s kind of really modest returns. Look for those big opportunities. Sometimes you have to take risk to get them. I used to buy the worst properties across the country and turn them around. So I took big risks, but I did the work to make them pay off, and generally – barring the eye storm – they did.

Jorge Newberry: Best ever book I’ve read… You’re stomping me, Joe… You’re stomping me. But I would say there’s a really good book that I’m reading right now which is called Fierce Conversations. I would say that’s a great book, so that’s top of my list right now.

Joe Fairless: Best ever deal you’ve done?

Jorge Newberry: Short-term memory – the 799, we stole it. Was 799 mortgages, we paid under three million dollars for it – we paid 2.875 for over 40 million dollars in debt. That was a steal. And again, odd circumstances lead to that, but it worked out. So that was my best ever deal that I can think of right now.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?

Jorge Newberry: I made a lot of mistakes, and you just try to learn from them. I’m trying to think about a specific one where I said “Oh, I really went out on a limb and that one didn’t work.”

Joe Fairless: If nothing comes to mind, we’ve thoroughly covered one of them already, so that’s okay.

Jorge Newberry: Yeah, [unintelligible [00:23:12].17] that’s my biggest mistake in my life. How I responded to it – it’s not so much the eye storm happened, but I wasn’t nimble. I had just what I described, I can get tunnel vision, “I’m gonna rebuild this.” I should have really closed the property, taken the insurance settlement and just wash my hands and walked away, and paid off all my investors, and it would have been much easier. In the end, that’s kind of settled me for the last decade. So be nimble. When chaos presents itself, take a wide view. I didn’t do that.

Joe Fairless: What’s the best ever way you like to give back?

Jorge Newberry: Keep families in their homes. Really, I know what it feels to be overburdened with debt, so if anyone calls me with advice, like “I can’t afford my mortgage, I can’t afford my credit cards, I can’t afford my student loans, my kid can’t afford their student loans”, I can tell them what to do to settle that loan at a discount and get rid of that on affordable debt. That’s a huge thing for me. I think the majority of Americans are overburdened with debt, and that needs to stop.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Jorge Newberry: The website is AHPFun.com. You can simply e-mail info@ahpfund.com and ask me, and [unintelligible [00:24:15].27]

Joe Fairless: Well, clearly, a big lesson learned on the frontend, and then how you responded – not only immediately after what was happening, where you just talked about having the wide view, but building the company that you have now, American Homeowner Preservation, and the type of approach that you take, helping families stay in their homes because you’re purchasing these at a discount, or giving them one other option to make things work.

I appreciate you talking about that, and also talking about how your business makes money, how you structure it with investors; that’s always a point of curiosity for the Best Ever listeners. Thanks for being on the show, thanks for having a candid conversation with us about what you’ve been through and what you’re currently focused on.

As a 20 year old college student, Chris did his first wholesale deal and made $7,000. For the rest of college, real estate was his hobby. After attending a Sean Terry conference, he was inspired to start taking real estate seriously and has already been successful. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Chris Salazar Real Estate Background:
-Founder of Arsenal Properties, a real estate investment firm
-Done over 50 single family deals and is now looking to transition into multifamily
-Has grown Arsenal to $4.7M in assets under management in under 6 months
-In the process of repositioning a 24-unit apartment building, and publishes content on real estate Graduated college last year
-Based in Chicago, Illinois
-Say hi to him at www.arsenalpropertiesllc.com
-Best Ever Book: Tools of Titans

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Chris Salazar. How are you doing, Chris?

Chris Salazar: Doing well, Joe. Glad to be here.

Joe Fairless: Nice to have you on the show. A little bit about Chris, and he’ll get into it in more detail… He graduated college last year; he’s done over 50 single-family deals and is now looking to transition into multifamily. Is that true?

Chris Salazar: That’s true.

Joe Fairless: Wow, okay. I’ll keep with the bio. I just had to fact-check that… I had to make sure that’s correct. Okay – he’s grown his company, which is Arsenal Properties to 4.7 million dollars in assets under management, and under six months he’s in the process of repositioning a 24-unit apartment building and publishes content on real estate. My head is spinning… Holy cow, Chris. Tell us what is your focus right now, tell us a little bit about yourself.

Chris Salazar: Sure, so I just wanna correct one thing – we just have about 4 million, not 4.7. We have something under contract, we haven’t closed it yet, but I just wanted to be clear there.

My background – I graduated college May 2016, and when I was 20 I did my first wholesale deal. I found a duplex completely undervalued and I was able to sell it to a cash buyer within like two hours, and I made 7k in the wholesale fee. I was pretty pumped after that, and it kind of just got me going. I wholesaled houses through college, and then I got the opportunity to work with a local investor who does hundreds of deals a year in my market. My market is the quad cities, by the way.

Joe Fairless: What are the quad cities?

Chris Salazar: Davenport, Iowa and the surrounding area, Moline, Rock Island, Illinois, North Iowa… So that kind of area, that’s my main market right now.

From there, after I did my first wholesale deal, throughout college I was still wholesaling. I got to working with this investor, I learned some of the business, and I went out to a Sean Terry event in Phoenix at the end of October and I was like “You know what, I have enough knowledge, I know all the tools to do this on my own… Why not just do it right now?” So right after that I came back to the quad cities and spoke with the guy I was doing acquisitions for and I told him that it’s time for me to go out on my own.

I found a partner, and from there we’ve built it into a pretty sizeable portfolio so far… So I’m just really excited to grow it and have the opportunity to do that.

Joe Fairless: You said you started with a duplex… Is that right?

Chris Salazar: Yeah, a duplex was my first wholesale deal.

Joe Fairless: That was your first wholesale deal. How old are you now and how old were you then?

Chris Salazar: I’m 22 now, I was 20 when I did that. That was in October 2014, my first deal.

Joe Fairless: Okay, you were 20 years old, you were in college, right?

Chris Salazar: Yeah.

Joe Fairless: Where did you go to college?

Chris Salazar: Augustana College. It’s a small liberal arts school in the quad cities.

Joe Fairless: Okay. You’re in college, you were probably a junior in college, you did a wholesale deal, and then you took that money and did what exactly with it?

Chris Salazar: That money I just plumped into more marketing. I increased the marketing, but throughout college I also was playing football, I started a real estate investment club in my college, and I was just so involved that I kind of treated real estate as a hobby at a time. It was just more so a learning experience for me to soak up as much information as I could, so that when I really was going full-time, I’d really go after it [unintelligible [00:04:29].12] process there.

Joe Fairless: Okay, so you started a real estate investment club in college, you were making money on wholesale deals and you were pumping it back into marketing… At what point did you start putting that money in your pocket so you could then invest in deals?

Chris Salazar: I never really use any of my own cash in any real estate deal, so for that money I wasn’t doing a ton of deal; I probably did six or seven throughout college. Like I said, it was a hobby… I was doing those deals, and I had to pay a lot of my own bills, so all that money wasn’t really being saved as much as it should have been. I was kind of just living a college kid’s life.

Joe Fairless: Okay, so you did 6 or 7 deal, you graduated college, then you started working with someone who was doing it at a high-level, closing on a ton of properties, and you were doing the acquisition for him. Then you went to a Sean Terry event in Phoenix less than a year ago, and after that event you came back to your area and you said “I’m gonna venture out on my own”, right?

Chris Salazar: Exactly.

Joe Fairless: Okay. What a story so far… We haven’t even gotten to the meat of it. So when you got back from the event almost a year ago, how much money did you have in the bank?

Chris Salazar: When I got back from the event – not too much; I can’t even really remember…

Joe Fairless: About 2k, 10k, 30k, 100k?

Chris Salazar: Probably 10k or so…

Joe Fairless: Okay, 10k. And did you have any properties that you owned?

Chris Salazar: No.

Joe Fairless: Okay, so you’ve got $10,000 in the bank, you don’t own any properties, you went to an event… What was it about that event — how much did that event cost and what was it about that event that you’ve decided “Hey, I want to spend my time and my money to travel to Phoenix to attend”?

Chris Salazar: I’d just been following Sean Terry, that’s how I kind of learned about wholesaling in the first place. I was listening to all his podcasts – he put out a bunch of great free information – and learning from him I just felt like I should really pay to go down there and meet him, and kind of network with all the other people that are doing big things in real estate. So that was my thought process there.

Joe Fairless: How much did it cost?

Chris Salazar: It was $500, I believe.

Joe Fairless: Okay. Not including travel.

Chris Salazar: Not including travel.

Joe Fairless: So all in you probably spent about $1,000?

Chris Salazar: Yeah. And then from there, as I said, a lot of what they key speakers were saying really resonated with me, and I went back and I found a partner and I picked up things from there. So it gave me the courage to go out on my own, finally.

Joe Fairless: Did you know your partner prior to attending the event?

Chris Salazar: I did.

Joe Fairless: How did you meet the partner and how did you pick that partner versus other partners?

Chris Salazar: This partner, I’m actually friends with his daughter; I knew him from a few years before, and I was just talking about what I was doing and he was interested in investing. He’s an investor in a lot of different things in different businesses, and he just kind of gave me the opportunity to do what I’m doing now.

Joe Fairless: What do you bring and what does he bring to the partnership?

Chris Salazar: I bring all the experience, he’s solely just a cash investor. He just provides the funds for all the deals, and I do all the groundwork.

Joe Fairless: So what was the first deal you two did together?

Chris Salazar: The first deal we did was a single-family, three-bedroom; it cost about 45k, we put in about 20k, and it’s worth 105k. From there — we were doing all cash deals at the time, and we were just refi-ing everything out.

Joe Fairless: Oh, okay. So you buy it for cash, you fix it up, and then you do a cash-out refinance, you get your money back and you hold on to it?

Chris Salazar: Exactly.

Joe Fairless: And what type of ownership do you have on that deal?

Chris Salazar: On the company as a whole I’m a 50% owner.

Joe Fairless: Okay, so everything is 50/50. Cool. With the $20,000 that you put into it, did you swing the hammer?

Chris Salazar: No, I contracted everything out. That was the first deal we closed on; I think that month we closed on several others, something like five more probably… So I kind of went and took action; I didn’t really have all the necessary tools at the time to go do it. I kind of just learned as I went, and thankfully, I bought correctly, because I was doing acquisitions prior, so I kind of knew how to buy correctly, and I didn’t get hurt on that end.
But at one point I was managing like 10 rehabs. I was the general contractor on all of them, jumping around, losing a ton of sleep but learning a ton in the process.

Joe Fairless: And you were doing acquisitions for 12 months, 24 months before you created this company?

Chris Salazar: Yes, I was the acquisitions manager for the guy in the quad cities for four months.

Joe Fairless: Four months, okay. Because you said you were doing acquisitions so you knew how to do it correctly, and then I was like “Wait, he wasn’t doing it for very long…” [laughs] But four months, okay. This is good, because it will inspire Best Ever listeners who are thinking maybe they don’t have the amount of years under their belt to get done what they wanna do, but here we go, we’re talking to you and you are going lightning fast through things.

Let’s talk about the largest deal in terms of price point that you’ve bought with Arsenal Properties.

Chris Salazar: Sure. The largest deal I’ve done is a package of 27 homes. That deal – we paid about 1.37 for the package, and I think the after repair value on it is about 2.15. The properties didn’t need too much repair, but they were all under-rented for the most part, and none of them really had leases. I think a couple of them were locked into a lease. So we raised the rents, we had some repairs done to the properties, and we kind of stabilized those houses.

Joe Fairless: Was that an all-cash transaction?

Chris Salazar: Yes.

Joe Fairless: And where are you at in the business plan of that deal?

Chris Salazar: We have all the rents up to market; I think all but one of those properties is currently rented right now, just because the tenant just recently moved out, so we’re turning over that unit… But that’s all been fully stabilized.

Joe Fairless: I think the story here is – now that we’ve gotten a little bit into it – not as much about your deals, but more about how you were able to convey the confidence and expertise to a high net worth individual who’s got the checkbook to pay 1.37 million dollars for a package of 27 homes where you’re gonna be a 50/50 owner. What do you think about that statement?

Chris Salazar: I would agree. It’s definitely about mindset, at least for me… The only experience I had was doing acquisitions for that guy, and then just doing several wholesale deals, but throughout that process I learned how to do a rehab for the most part, but the biggest learning curve was when I just started buying these houses and I was thrown into all the rehabs, really managing contractors and having our property management team oversee everything. It was just completely different than what I was expecting. It was really tough and I was working 16 hour days most days. It was definitely worth it. I definitely failed, but the faster you fail, I guess the faster that you learn and can grow.

Joe Fairless: The gentleman who you’re partnering with – you said you’re friends with his daughter. How long were you friends with her? Basically, how long did you know him prior to you two partnering up?

Chris Salazar: Four years or so.

Joe Fairless: So college, basically?

Chris Salazar: Yeah, late high school.

Joe Fairless: And what was the first conversation that you had with him about business?

Chris Salazar: He always knew I was interested in real estate. He thought it was interesting that I was doing wholesale deals in college, and he thought that was pretty ambitious for being a student still… And I know he really trusts me, which is great to kind of have that relationship, and I think that’s one of the most important things, especially when you’re using other people’s money, to be a trustworthy person and be willing to do the right thing.

Our first conversation was just really explaining what I did, what I can do and what I needed. Initially in our conversation I was just hoping to maybe convince him to give me money to do one deal… But he had a bigger vision, and I’m so glad he did, because it turned into something great and we built a solid portfolio in a short period of time so far.

Joe Fairless: There had to have been some bad news along the way you’ve had to give him… So what was that bad news and how did that go?

Chris Salazar: My biggest challenge was dealing with the contractors and really putting my trust in some untrustworthy people. He is from Chicago, he wasn’t involved in any of the deals, like I said, so I was doing all the ground work… And the biggest news was that we lost money from a contractor [unintelligible [00:12:49].05] or me not vetting the contractors properly in the first place. That was the biggest–

Joe Fairless: On that one example – or multiple examples – where you lost money, how much money was lost and what would you do differently if presented the same scenario?

Chris Salazar: We probably lost 3k or 4k on that, so it wasn’t a big mistake, but I just learned from that experience to just vet everybody the same way, put them through the same interview process, and really go with my gut feeling on these guys.

I was doing so many projects and I was overwhelmed, so I was just putting guys in jobs and really wasn’t doing all my due diligence on them as I should have.

Joe Fairless: The package of homes that you mentioned – 27 homes – the ARV is a little over 2 million; you’ve got about 4 million, so what makes up the second-largest chunk of that total assets under management?

Chris Salazar: I think we have two duplexes… The others are single-families. I think we bought 50, sold off 3 of them, so we’ve got 47 properties, actually.

Joe Fairless: What’s the macro-level plan for it? Is it just continue to buy with cash, fix it up, then refinance out the cash and hold on to them?

Chris Salazar: Yeah, some of these deals we’re doing now that are off-market we’re leveraging upfront, instead of paying cash, but the deals that I’m pulling off the MLS – we’re buying those cash.

Joe Fairless: What would you tell to a Best Ever listener who wants to find a partner like the type of partner that you found and have a similar structure?

Chris Salazar: I would say networking is very important. Tell people what you do and how you can help them. Always offer something valuable, but really more importantly, just tell people what you do and really be excited about it, have the prior knowledge and have the confidence. I think confidence is very key when it comes to talking to high net worth individuals like this.

Joe Fairless: What is your best real estate investing advice ever, based on your experience so far?

Chris Salazar: Set goals and take action. If you set your goals ridiculously high and it’s a failure, you’ll fail above everyone else’s successes. That’s a huge quote I like to go back at. I’ve been writing my goals down for a couple of years… It was cool to go back in my journal and actually look at what I wanted to accomplish and what specifically I wrote down. A lot of the things I wrote down are coming true.

It’s really setting in my mind what I want to accomplish and just taking action on this. I mean, so many people listen to these podcasts or any real estate information out there, they consume everything, but then they just never go out and do it… So I would just say “Do something.”

Then another piece of advice is always be willing to give back. What I like to do also is just talk to other people that are my age – really anybody that wants to get involved in real estate deals. I like to just walk them through what I did and how they can apply the same principles and do the same thing.

Chris Salazar: The best ever deal would be the package of 27 properties. It was great.

Joe Fairless: What’s a mistake you’ve made that you haven’t talked about, that you’ve learned from?

Chris Salazar: I would say not doing my due diligence, whether it be on people or on a specific property. Really know your numbers, know what you’re getting into and definitely go with your gut when you’re dealing with people and putting your trust in them.

Joe Fairless: What specific aspect of knowing your numbers did you mess up on in the example you’re thinking of?

Chris Salazar: The repair costs. I got into a deal where we didn’t lose money, but we could have made a lot bigger profit on the deal, on the flip. It was just me being too novice on everything, and just not knowing my numbers in terms of repair costs.

Joe Fairless: What part of the repair costs was not accurately assessed?

Chris Salazar: There was a foundation issue. That was an additional $9,500, I believe. There was a sewage issue that was a similar cost… Those [unintelligible [00:18:02].04] right away, and I could have just come around that by just getting an inspection done on the property, instead of being lazy.

Joe Fairless: What’s the best ever way you like to give back?

Chris Salazar: Like I mentioned before, I like to help people realize what I do and how they can create the same life by investing in real estate, whether it be a few properties replacing their monthly income, or if they wanna create something a lot bigger, it’s really possible.

Joe Fairless: What’s something that you would tell a Best Ever listener “Hey, this does sound good, but man, you’ve gotta watch out for XYZ”?

Chris Salazar: I guess getting into something where you don’t fully know what can go wrong. I knew what I was doing in the sense that I knew how to buy a property correctly, I knew how to mostly evaluate repair costs other than the unknowns that come up, but if you’re gonna get into something, know all the risks and kind of know exactly the efforts that you’re gonna have to put into it – or at least for the most part – before you actually get into it.

Joe Fairless: And how can the Best Ever listeners get in touch with you?

Chris Salazar: I have a website, it’s ChrisJSalazar.com. My cell phone number is on there as well, and my e-mail is chris@chrisjsalazar.com.

Joe Fairless: Do you currently have a meetup locally? I know you said you started an investment club while in college…

Chris Salazar: Yeah, that was just specific to my college. I still speak at that every year. But locally, there are a couple. I speak at them sometimes… But I live in Chicago now.

Joe Fairless: Well, Chris, incredibly impressive… Bravo! I’m clapping. Congratulations on what you’ve done in an incredibly short amount of time. Your story is an inspiration. This truly is a story of your determination, how you got out of the gate really quickly while working and doing wholesaling in college, you started a real estate investment club in college, and the relationships that you’ve built in a short amount of time have resulted in some lasting benefits.

When we talked about how you had a conversation with the gentleman who’s daughter you know – you knew her for four years, so indirectly you probably knew him for about four years or so, and some of the things you think that really solidified the partnership was him being interested in how active you were in college doing wholesale deals, you also started an investment club, and then the trust factor, too. You mentioned how you like to give back and talk to others, as well as having that confidence based on the stuff that you’ve been doing along the way.

Really just a fascinating story. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Secure Pay One is an amazing solution to landlord problems. They are not a full service management company that takes over control, but rather works with you to help with your duties. Listen in to find out how Linda and her team can help you. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is a show where we cut out the fluff and we only talk about the best advice that moves your real estate investing business forward.

This is the world’s longest-running daily real estate podcast, and with us today to help us keep the momentum going – Linda Liberatore. How are you doing, Linda?

Linda Liberatore: I’m good, how about you?

Joe Fairless: I’m doing good as well, and looking forward to diving in with you. Linda is the president and founder of Secure Pay One, which is a quality service providing beneficial assistance for real estate investors. We’ll get specifics as far as what that means.

She has assisted more than 50 real estate portfolios encompassing over 1,000 units, and has a 98% client retention rate. She’s conducted 1,000+ seminars on software applications for property management and desktop productivity, and she’s based in Schaumburg, Illinois, which is near Chicago. You can say hi to her and look at her company a little bit more at SecurePayOne.com. With that being said, Linda, do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Linda Liberatore: Sure, thank you for that really nice introduction, Joe. We started the business probably seven years ago, and as you know, and you dive deeper with all your guests, through that time our role has evolved; you always have the business plan, all the research you do, and then reality strikes and you have to zig and zag accordingly.

I say we are probably the number one tenant communication and payment assistance. We’re a little bit different than a management company, that’s what makes us so unique. We support people that are growing their real estate portfolio and do not want to flip over control, if you will, to a full management company. They use us as the form of a virtual assistant.

We have landlords across the nation. In fact, we have some across the big pond. They, for one reason or another — in those cases some men have gone on to Europe… They may have just a few couple investment properties, and then we have others that are out of state and they’ve selected us to be the liaison with their boots on the ground, with their maintenance team, their leasing agents, and then we handle all the servicing. We’re the main point of contact with the clients, meaning the residents.

Joe Fairless: Okay, that’s helpful. So you’re not the management company. Your ideal client would be someone who’s got a handful of rentals or more. They’ve been self-managing, and the paperwork and the time commitment that it’s taking to do all of it is becoming cumbersome, so you’re now able to work with them and you handle some of the tenant communication and then also get them paid on the rent.

Linda Liberatore: Absolutely. I love that you added a couple things to that description. So we are the main point of contact. We’re hired by somebody that no longer wants to be the main point of contact for the residents… So it’s not some, it’s everything. I guess you could say technically not everything, because we’re not the leasing agent. But once that lease is signed, it’s our phone number that’s given out, it’s our e-mail; we become their point of contact.
So the relationship really is with the landlords — when you say “a handful”, certainly they start that way, but we have ones that have gone from 3 to 60 in a couple years, so it’s for people that are realizing, identifying where the weak areas are in their system and outsourcing the lowest level tasks, but some very important tasks, like collecting the money.

Joe Fairless: What are your fees?

Linda Liberatore: We do it on a fixed income, so we don’t charge it based on the rents. Our standard fee for one month, one unit, would be $50. If your average rents are $1,000, if we say nationwide and affordable housing and the average rent is probably at $1,000, we’d be coming in at like 5%. As you know, most full-service management would be 10%.

Then one other important distinction is we don’t pay their bills. So while we coordinate with the maintenance teams — I think this is a really important distinction, Joe… I’m just gonna maybe back up that comment. So when we don’t pay the bills, it means a couple things.

To an investor it’s a very big selling point, I’d say, because those investors that aren’t looking for full-service are looking to remain in control. They want to do it all themselves. As you said, they’re finding themselves being buried, and they still want to be the one in total control, but they see that they’re losing control, right?

Joe Fairless: Yup.

Linda Liberatore: So if they bring in someone like us and they still get to pull all the strings – they get to use their favorite plumber, they get to use maybe their father-in-law as a handyman, it doesn’t matter to us. They provide us those lists of service people when we start, all their contact information; I have to be able to get a hold of someone, of course, so they give us that full list.

Then we have a full web-based application that we’ve built for us as a company, and I put it up against the big ones, Appfolio or PropertyWare; it tracks maintenance, it tracks payments… So it’s a transparent process to them, but even more so those liking to be in control. Everything we get is e-mail to them throughout the day. So it’s not somebody that’s gonna be off to Aruba and never wants to see their properties again.

Joe Fairless: That makes sense, okay. When we’re talking about the leases, you don’t do anything with the lease and you don’t pay the bills, but you’re the main point of contact for the resident and you coordinate with the vendors if there’s a toilet that needs to be fixed; then you e-mail the bill to the owner and then they coordinate payment directly with the vendor, right?

Linda Liberatore: Absolutely, yes. That describes the process.

Joe Fairless: Okay. What are the main time-consuming aspects of your team’s job?

Linda Liberatore: [laughs] Come on, I know you know this one. Probably one of our very first clients, [unintelligible [00:08:52].29] original business plan versus now, we’d be collecting money only… ACH, to be honest; we thought it was gonna be all ACH seven years ago, which we know that’s not too right, and there’s certain markets that may never be true if they’re non-bankable. But one of our first clients is a big owner of a real estate agency that had investment property, and he looked square at me across the table and he said “Let me ask you something… Would you take those calls for me? Would you take that 30-minute call full of drama, and get it down to a concise, two-minute e-mail?” I said I could do it, which of course, I didn’t know what I was promising at that time, especially for the price I was given. If you know anything about ACH and transactions, you know that’s a pretty low-cost item, and the wholesale market, let’s say with some of the banking perspective, when you start answering calls, that’s a whole different game.

So yes, what’s the most time-consuming thing my staff is doing is giving those calls, watching for the legalities of those calls… You know the rental process is a very big legal process and we have to deliver of (I’ll call it) bad news. When people don’t pay or something isn’t going to get fixed, maybe in their lease it says they’re supposed to fix it; in single-family homes a lot of times the repair is on the resident, so we kind of have to do a lot of delivering things that people don’t necessarily wanna hear.

Joe Fairless: Do you do the eviction process?

Linda Liberatore: Let’s put it this way, we assist with it. When you talked about the couple of things when you said “You guys don’t do the lease”, well we kind of do it at the renewals time, as long as they provide that legal documents, because as you can imagine, even right here in Chicago – Chicago is different than what we refer to as Lake County; anything outside of Cook County might be a different lease.

So when it comes to the legal process with evictions, as long as they can give us their attorney to deal with, or give us (let’s say) their three-day notice, their five-day notice, they can give us a template, we can fill it in.

Now, as you know, in most counties you have to have that served, so then again, I’m looking for their boots on the ground. If they can give me the contact, we go ahead and get it to them, so that they can print it and go serve it.

We do this for a lot of people, so we do do it, but ours is a partnership, and if they’re willing to provide us the appropriate documents, we’re more than willing to do it.

Joe Fairless: Okay. What’s been a main challenge that you’ve had as you’ve scaled this company to 1,000+ units?

Linda Liberatore: Let’s just say it’s the passion of working with each landlord and trying to help them meet their goals; it’s been enlightening to see all the different approach as to how they go out there. I see it as a challenge, and it’s been somewhat of a success, because what it’s done has evolved us to more of a consultant role… Not intentionally, but just saying “Joe does it this way, and I see how successful he’s done it… Have you considered doing this?” So we do get a lot of different methods, so challenging I would say would be the training of a new employee; that has been very challenging, and yet they pick it up really quickly, but there’s no manual I can just give them, because if Joe does it different than Mary — and I’m a big process person. To me process, wherever I can reduce time on a task…

We do do a lot of texting, so that again cuts across all socio-economic levels… So that’s the best way to reach people, and we’ve found that that saves us money, of course, if we can do that. We’ve tried to add electronic forms to fill out some of the maintenance, to get them to qualify things versus just saying “There’s this big leak”, things like that.
We’ve looked at process where we can make things more repeatable to save everybody money and time, and get a more accurate assessment of what’s going on with the building.

Joe Fairless: When you take a look at your business — when you started your own company, Secure Pay One, what’s been something surprising that you’ve come across? And how long have you had your company, just for context?

Linda Liberatore: About seven years.

Joe Fairless: Okay, for seven years; you’re now at 1,000 units… What surprised you about this?

Linda Liberatore: Well, if I take it all the way back in time, I could go with — I don’t know if it’s a surprize or a mistake, or advice… One of the things I did, I did a lot of (I’ll call it) pre-exploration before I started the company, looking at other businesses, trying to look around… But the real disadvantage to me is that I was not already a property manager or already a real estate agent. I am a licensed real estate agent and I have been for years, and I had worked with some investors over the years, but what it means to somebody starting a business is I didn’t bring my book of business. So like, a lot of times somebody leaves a property management company and they spin off and go start their own down the block; let’s say you’re in a different market.

So it was really, really painful and tough when I first started to get my first clients. Actually, my first client came from a reference from the bank, so the ironic part is the bank trusted me and gave me an ACH tool that basically can take money out of anybody’s account anywhere, but I didn’t have a client that was going to give me their property to take care of. My very first referral came from there, so I’ve spent a lot of painful time — I feel like I was flown out of the gate, and I wasn’t in sales before I started; remember, as you read, my background was in training and technology and trying to simplify a data analysis… So yes, I like people, but it’s different than selling, and selling yourself and selling your own company, and that was a big struggle.

Joe Fairless: What’s your best real estate investing advice ever?

Linda Liberatore: I’m a big daily person. Whatever you’re going to do, you have to do it daily. You have to get out, whatever that activity is that’s gonna push you forward… You can’t do it on odd days, even days; you’ve gotta make the commitment to do it daily.

Joe Fairless: What’s an example of how you’ve played that out in your own life?

Linda Liberatore: I would say reaching out — when I first started, when I was describing that pain, I had to make many cold calls (very, very cold calls) and just couldn’t give up; I just had to keep going, keep going. I would say that one of the most successful things we find with these tenants is they’re all across the country, but our communication is consistent. We have a whole (I’ll call it) kind of a communication method of mailing, e-mail, text… So it’s that consistency, if you will, that we tried to be sure — now, we don’t do it daily… They’d be hanging up on us, right? But we do build a process that we’re going to commit to, and in our case it’s the monthly cycle… But making sure you’re consistent.

We make sure even to the point of the mail, no different than your utility bills – it gets there on the exact same dates. It’s not when I feel like mailing it. We make the commitment to a specific day, so that when they open that mail that day, they can expect it there.

Joe Fairless: What’s something now that you still do daily?

Linda Liberatore: I don’t know if you want me to say this, but I’d say I’m a podcast and a book junkie… So the education of the industry and absolutely committed to it every single day. I’m in probably 8 real estate associations here locally, and I go to those meetings. Now, that’s not daily, but to add value to those meetings, I have to do the research and the education and the self-education, and that’s every single day.

Linda Liberatore: This is a new one and I’m a big reader, but I’m gonna go with The 10X Rule by Grant Cardone. I can relate to that.

Joe Fairless: And Best Ever listeners, I’ve had Grant on the show before, so you can go check out episode 190. He talks about using a video LOI that netted him 20 million dollars in profit (episode 190). Best ever personal growth experience and what did you learn from it?

Linda Liberatore: I probably didn’t realize it at the time, but I would say it changed my life… Back in about 2001 I was exposed to a web-based application; that was new, obviously, very new at the time. I sat down and I researched it to the point where I found the owner of that company, and went and pitched myself for a job there, because I was so impressed and awed by it. Basically, that was a startup out of New York City, and the rest is kind of history.

Joe Fairless: Best ever deal you’ve done?

Linda Liberatore: I’m going to say that I invest a little bit, but I’d say it’s how we’ve supported — and there was somebody just most recently, she’s been a new client with us probably about nine months, and she had a building coming up for a purchase… And here in the Chicago area we have some areas that are more challenging and there’s some bigger numbers to be made on it; she got us at rent roll and we helped her get out welcome letters, everything, literally the day after closing. We’ve got an increase already coming up 1st August. That was a big accomplishment for her.

Joe Fairless: Best ever way you like to give back?

Linda Liberatore: I’ve actually just hooked up with our local college here. They have an entrepreneurial program for young men and young women, and they run kind of small Shark Tank [unintelligible [00:20:06].12] so I have volunteered to go up there and to do some working with the students, if you will, do kind of get them psyched.

Joe Fairless: What’s the biggest mistake you’ve made so far in real estate?

Linda Liberatore: Oh, my goodness, where would I start with that? You know, I have enough–

Joe Fairless: You and I both… [laughter]

Linda Liberatore: Thirty more minutes I need for that one! The biggest mistake… I guess I’d go back to that first story; I don’t know if it’s real estate-specific, but start a business — I really wish I had the first one signed on the dotted line before I open the door. I don’t know if it would have been just a confidence booster, but trying to get that first one was very tough.

Joe Fairless: What’s something that you’ve evolved in your business that you weren’t focused on as much when you launched it?

Linda Liberatore: I would say – this is a good learning experience – with the legal aspects of it… You never want to have a tenant be able to quote you the laws in that state. So yes, I think we’re much more sensitive to requiring having a lease. When we first started, remember we were a web-based application, so we didn’t necessarily need the lease to answer the information. Basically, if you step back, if you’re an investor, all I needed from you was what day do I start collecting? How much do I collect? What’s the terms of the lease? What’s the phone and contact? But we didn’t realize when we took that shift with the phone calls — you would just think “Oh, that’s a simple call; they’re just gonna call in their toilet and that’s it. Next call.” But all of a sudden, you’ve got humans involved in this business and they can begin to ask things that, as I said to you before, we had to refer back to the lease to see what was covered.

I’d say that’s an area that I didn’t anticipate certainly as a risk factor, so now we’re definitely very sensitive to having that lease in hand when we get started.

Joe Fairless: What’s the best place the Best Ever listeners can reach you?

Linda Liberatore: Well, everywhere. We’re on LinkedIn, Linda Liberatore, as you said it, and Secure Pay One is the name of the company. We’re on Facebook, Twitter, we have a YouTube channel… We’re everywhere. We have an electronic newsletter that goes out once a month. One of the employees has been showing that for us for a couple of years; she does a great job, and we’re pretty much everywhere. I could give my cell number too, I guess. My cell number would be 847-436-9006.

Joe Fairless: Awesome. Well, Best Ever listeners, I recommend checking Linda’s company out if you are looking to start automating the process as a buy and hold investor but don’t wanna give up the reins entirely to a property management company. It sounds like a really interesting option.

Linda, thanks for talking about your business, because normally I like to not have it as focused on someone’s business, because I don’t want the self-promotional stuff, but you by no means did that. I was just genuinely interested in your company, because it’s a business model that I haven’t come across before, and any time I find myself in one of those conversations, I’m fascinated. I loved to dig into how you make money; you said you get $50 for every unit… At least for one unit; perhaps there’s economies of scale, we didn’t really talk about that, but just the overall “Hey, this is what we offer and this is what we get”, because as real estate investors we’re all entrepreneurs in some level. Even buy and hold investors, we’re entrepreneurs because quite frankly, when we buy a property and hold it, we’re buying a business if we’re thinking about it the right way.
So thanks so much for digging in there, talking about how you launched it, lessons you’ve learned in customer service, as well as the legal aspects and leases. I hope you have a best ever day, and we’ll talk to you soon!

As an investor, it’s important to know exactly when to exit your investments. Many investors make the mistake of hitting their goals with an investment, but stay in the deal rather than exiting as they originally planned. Jordan tells us how and why to stick to you original exit plan.

Jordan Fishfeld Real Estate Background:
-Co-founder and CEO of CFX Markets, a venture-backed trading platform
-Assisted on implementation of the JOBS Act regulations and the intra-state crowdfunding rules
-Decade of investing, development and sales experience in the real estate industry
-Prior to he was finance attorney who assisted on more than $1 billion worth of syndicated loan transactions
-Based in Chicago, Illinois
-Say hi to him at https://cfxtrading.com/

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

Because it is Sunday, we’ve got a special segment for you called Skillset Sunday, where we talk about a specific skill that you can hone after listening to this, or perhaps adopt if you haven’t adopted it. This is an important skill; this is a skill on how to stay true to your original financial modeling. Basically, how to not get greedy and identify when it is time to exit out of an investment. With us today to talk through that – Jordan Fishfeld. How are you doing, Jordan?

Jordan Fishfeld: Good. How’s everything? Thanks for having us!

Joe Fairless: Yeah, nice to have you on the show. Jordan is the co-founder and CEO of CFX Markets, which is a venture-backed trading platform. I interviewed him on episode 558, titled How To Invest In a Secondary Market… So you can learn more about it there, as well as hear his best advice ever on a previous episode, just by searching his name on the BestEverShow.com, and that will come up. With that being said, Jordan, even though we’ve talked about it a little bit, can you give the Best Ever listeners a little bit more about your background and your company? That will add some relevancy to our conversation with the task at hand for what we’re gonna talk about.

Jordan Fishfeld: Yeah, sure. My background is obviously in real estate. I ran a capital raising platform for real estate transactions and found that investor liquidity was a really big issue and something that I wanted to support more specifically, so my partner and I developed a trading platform where minority investors and LP investors could go and sell their assets in an open, transparent but secure way.

Before that I was an attorney, which was fun… Kind of.

Joe Fairless: [laughs] Alright, so you’ve got the legal background, and then you’ve done some crowdfunding work, and now you’ve got the secondary market with CFX Markets, where people can sell their shares of companies on a secondary market if they need to exit out of it. So the skill that we’re gonna be talking about today is how to know when to stay in or when to leave an investment. How should we approach this conversation?

Jordan Fishfeld: I think there are a few different things that come to mind in deciding when it’s the appropriate time to exit. I think when you’re the sponsor, when you’re in control of the deal, that decision is actually much easier. You’ll sell it when you want to, and when you think you can get that cash back that will be supportive to your investors. Where it becomes really difficult is what if you’re one of those small investors and right now is the time that you would normally wanna sell it – what do you do?

What we’ve found is most investors – both sponsors and limited partners – kind of suffer from what’s clinically called “the endowment effect.” Basically, when you own something, you kind of wanna keep owning it, even if it’s not in your best interest or fitting within your original model.

What I think is an unbelievably important skill is with every investment – real estate included, and probably most importantly – if you were targeting a 20%, 15% return on a specific project over a certain number of years and you’ve kind of hit your proforma, think “Would you buy it today at the price that you are looking to sell it?” and if the answer is no, then you should probably sell it, and really sticking to that proforma or that goal that you set for yourself going into the project.

I know prior to some of the new technology and new rules it was really hard if you were a limited partner to sell your asset, but that’s not the case anymore across all assets, so it really is now a skill of the investor… Not just the sponsor, but a skill that the investor has to have going into these limited partnership deals is annually reviewing your deal – is this exactly where you want it to be? Is the return that you’re expecting gonna continue? And if not, you have that opportunity to sell it and guarantee whatever return your goal was originally set for.

Joe Fairless: I’m reading a book that is titled Mistakes Millionaires Make. It is one of my favorite books of all time. I literally bought it yesterday and I’m probably gonna finish it today… It’s that good. I’d say 25% of the mistakes listed in there have to do with an entrepreneur having a company – in this case it’s not necessarily real estate, but it’s certainly relevant to real estate investors… Having a company, it’s worth 100 million bucks, but yet they stick in, stick in, they don’t sell, and then eventually (holy cow) something happens, the winds shift, the government gets into their business and all of a sudden it’s worth nothing.

Jordan Fishfeld: Or even – in a better case scenario that’s not tragic – you spend the next nine years with this business and it’s now still only worth 100 million, when you could have taken that 9 years ago and done something better with it, right? That’s where I think a lot of value is lost, both in real estate and in other opportunities, where you end a project where you’re like “Oh, this is great, but if I could have sold it five years earlier and had the same gross return” and put that money to work in maybe some project that’s more appropriate or even gained a little bit more diversification or more safety – was that a better decision at that time?

I think that you’re right… That mistake, that endowment effect problem is something that’s really hard to overcome. This isn’t an easy thing to do, to sell something you own that’s going well for you; it’s a very hard thing, and I think that’s why it’s a great skill that is a learned skill. It is not a natural occurrence, it’s something that you have to learn and be good at and really stick to. I think people that do it well benefit tremendously from putting capital to the most efficient use possible at the most efficient time.

Joe Fairless: And on the flipside, the grass is always greener, and if we have something that’s working and we are comfortable with — in this case we’re a passive investor, we’re not the general partner with a limited partner. If we’re happy with the general partner — because so often the number one thing is “Is the general partner someone who I trust and do they qualify based on what I’m looking for in someone overseeing my investments?” Because the deal is always secondary; the people running the deal is primary, in any investment.

So if we’re comfortable with that individual, then why not hold on to what we’re doing with that individual already, versus going and taking it out and doing “the grass is greener” somewhere else?

Jordan Fishfeld: Well, I think there’s a few points there. First is there’s no reason why you can’t take that money and put it into a new project of that same manager. Most managers aren’t running one project and are not raising for one deal at any given time if they’re that good… So to say “I would like to take my cash out of this deal, which has kind of already run its course” — specifically talking about a development project… We’ve found great developers who know how to manage a construction crew, know how to put together great plans, work with the government to get approvals… And then once they get their certificate of occupancy, they kind of pass it off to a brokerage or a property manager to lease it up.

So most of your bet is on the developer, not on the property manager, so in this case, why not sell at the time of the certificate of occupancy and put money into the new developer’s project, which is what you had bet on in the first place.

So things like that where 1) a new capability, given the new rules and the new technology – this wasn’t always possible, which is why many investors I think will have a very difficult time with this process in the early days… But if you compare asset classes, so public securities – specifically people who are not traders; people who invest, say, in Apple or Facebook, not to try to sell it the next day or during a spike and then a dip, but who say “I believe in this company, I believe in the manager and I think it’s gonna grow…” They look at that stock every six months (maybe every year) and say “Do I still think this is a good company that’s gonna grow?”

If you bet on Groupon early and then two years later you said “Is it still gonna grow?” and maybe you said “No” and you sold it and you did really well. Facebook, if you look at the company a week after it IPO-ed or a month after it IPO-ed and you looked at it today, in both instances you said “I think this company still has tremendous growth potential.” That’s kind of the same analysis – “I’m gonna buy it again today. If I wanna buy it again today, then that’s what I should do.” If you wouldn’t buy it today at that same price, then you should probably sell it. I think that’s the skillset that investors are almost required to have going forward, as choices and opportunities and efficiencies become more commonplace.

Joe Fairless: That’s a really simple, boiled down way of looking at it. If I wouldn’t buy it at today’s price that I could sell it for, then I should sell, right?

Jordan Fishfeld: I think so. And there’s obviously a lot of different theories, but this is one that I think will definitely be a great skill, and the more and more investors that start thinking this way — we’re seeing it already in the financial advisor and kind of alternative asset marketplaces. When advisors now do your annual check-up, this is exactly what they do; they just haven’t been able to make that recommendation for real estate. I think that’s why this is a really powerful tool for active and passive real estate investors, that has kind of been overlooked in this market, because it hasn’t been that easy to do earlier in the history of this asset class. Now that it is much easier – again, with the new rules and new technologies – it’s something that needs to bleed over into this space, to have that same type of efficiency that we have in the public market investment decision-making process.

Joe Fairless: The one challenge that I would have with that (just thinking about it a little bit more) “if I would not buy it at this price, then I should sell it” is I bought it at a lower price — and let me use a specific example… An apartment community I have in Houston – it’s 250 units, I bought it for 14 million dollars. 16 months later it is worth 21 million dollars; we got an appraisal. We put in 2 million, so all-in we’re at 16, now it’s worth 21 million dollars. Well, it’s worth 21 million, but I would have a hard time buying it for 21 million, because we bought it for 14 million. However, that doesn’t mean it’s not a very good investment if I brought in additional capital and did even better renovations and increased the rent even more. So there’s gotta be some sort of psychology with price anchoring tied into this. Because just like store – “Buy it for 100 — no, never mind, we just slashed the price to 50.” Well, now I don’t ever wanna buy it for 100, even though it might be worth $200. So there’s gotta be that playing into that mentality as well.

Jordan Fishfeld: There’s so much psychology in this decision process, and actually part of this thesis is coming from what’s going on in Michael Lewis’ new book “The Undoing Project”, which if you haven’t read, definitely check it out. It’s all about the psychology of decision-making and financial market decisions… And you’re exactly right – price anchoring, emotional relationships with the asset class, the fact that you already own it… I mean, they have a name for what you’ve just described, which I talked about earlier – the endowment effect. You own it and you bought it cheaper, so you don’t wanna 1) sell it, or 2) buy it for a higher price than you originally paid for.

I think this is a very hard skill to learn and to implement, but at the same time very relevant. Now, the question I would have for you is similar market, similar asset class, 21 million dollar apartment project that has some renovation capability with the ability to boost rents and increase occupancy – would you buy that next door? And if you said yes, then clearly the reason why you wouldn’t wanna pay 21 for this specific project is because your basis was lower and you’ve price-anchored. But if you would buy the project next door with the exact same features for 21, then I think you’ve made the right decision to keep it and hold it and put more money into it.

You’re exactly right, the psychology around this process is very potent, and it requires a very determined and sophisticated and focused investor. With this skill, I think you’ll see some great return on your projects.

Joe Fairless: Is there anything else that we haven’t talked about as it relates to “Should I stay in longer or should I sell?” that we wanna talk about?

Jordan Fishfeld: I think it’s a multi-variable decision. I think “Should I stay in longer? Would I buy this project at this price?” I think is a great baseline. Again, everybody has their own tax burden, so you have to just ensure that selling it is the same as buying it, because when you sell it, you’re actually gonna get a tax bill; when you buy it, you don’t get a tax bill… So making sure that that’s considered…

The other thing is is there a project that you can put your money in to satisfy your same goals? I think that’s a really relevant point right now – if I sell this project where my initial target was 12% and now I’ve hit that, and I know that for the next four years I’m gonna be making 8%, so that will reduce my overall yield on the project to (let’s call it) 10%, can I find anything that has a great than 10% yield in this market right now, that has the same risk profile? If not, then you’re kind of stuck in your current project for that reason.

Where I see it being really problematic is, specifically in the development project, you create all this value, you have this great jump in IRR from year one to year two or three – whenever you get your certificate of occupancy – and then during the lease-up phase you’re kind of averaging down your IRR as the leasing effect takes place. But if you can move that money into another development project and kind of go after your 25ish, 20% return over that two year period with significant risk, and if that’s what your profile is hoping for, then you should do it.

Again, it still always depends on the investor individually and the projects individually and the opportunities available to that investor. But as opportunities explode with the online capital raising space, as information explodes all over with podcasts and papers and books, and as yields compress, there’s a lot of different reasons why you should stay in and not stay in certain investments. But I think the skill of just doing a check-up on your investments and making that decision is very powerful.

Joe Fairless: Yeah, I certainly agree. This has been a fun conversation. Jordan, where can the Best Ever listeners get in touch with you?

Jordan Fishfeld: Come to our website, it’s CFXTrading.com. They can e-mail me at Jordan@CFDTrading.com. I’m looking forward to hearing from your users, and also always looking forward to chatting again with you.

Joe Fairless: Cool. Jordan, thanks so much for being on the show, talking about if we should or shouldn’t stay in an opportunity. We should just always do a check-up on our investments, take a look at the tax consequences, the true value of it today versus when we bought it, if we still would pay that same amount for a similar or exact property, but just not that one, to try and distance ourselves from the process. If we’re reaching our goals, if we already reached our goals, and if we have a new project that will accomplish whatever we’re looking to accomplish in the development deal is a good example of that.

There’s more risk on the turning dirt into actual steel and places where people can live, but then there’s less return on the lease-up because the risk has certainly been mitigated a lot once people are starting to move in there and occupy. So maybe if you want to do something more aggressive, then you can just bounce around from development deal to development deal during the first 12-24 months.

Thanks so much for being on the show, Jordan. I hope you have a best ever weekend, and we’ll talk to you soon.

Jordan Fishfeld: I appreciate it. Thanks so much. Talk to you soon, Joe.

Fear and focus were two paramount tools for Sean Conlon, star of all brand new reality series, The Deed Chicago. In this episode, Conlon shares details of journey from an assistant janitor to the fame and fortune he has amassed and now helps others achieve. With a passion for real estate, Conlon began making evening cold calls for a brokerage after his long day job shift. He learned the streets of Chicago like the back of his hand and grew his empire by selling and eventually developing real estate. Turn up the volume and learn how fear and focus can change your life, too.

– Star of New CNBC Television Reality Show The Deed: Chicago – a show on rescuing real estate projects.
– Owner of Conlon & Co: A Real Estate Merchant Bank. Conlon spent his nights making hundreds of cold calls until he began to make a name for himself. Today, he presides over one of the most extensive real estate businesses in the country and is a leading visionary in the field.
– Chicago real estate mogul who went from being a janitor in 1990 with to running successful real estate business The Deed on CNBC will follow him rescuing real estate projects in Chicago
– Based in Chicago, Illinois
– Best Ever book: City of Thieves

Made Possible Because of Our Best Ever Sponsors:

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

We’ve interviewed Barbara Corcoran from Shark Tank, Robert Kiyosaki, the author of Rich Dad, Poor Dad and a whole bunch of others. We’ve got a treat for you today, we’ve got the star of the new reality show The Deed: Chicago, Sean Conlon. How are you doing, my friend?

Sean Conlon: Hey, nice to meet you, and your listeners, too.

Joe Fairless: Yeah, you pumped me up right before we started recording, like “I can’t wait to talk to the Best Ever listeners.” I know they like hearing that.

A little bit about Sean – he is the owner of Conlon & Co, a real estate merchant bank. He’s also a Chicago real estate mogul who went from being a janitor in 1990 when he came to the United States, to running a successful real estate business. As I mentioned earlier, the is the star of a new reality show called The Deed on CNBC, which will follow him rescuing real estate projects in Chicago.

There’s a link in the show notes page to the trailer, go check that out, and then go to CNBC and watch the show, as well. It’s based in, obviously, Chicago, Illinois. With that being said, Sean, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sean Conlon: Yeah, I came to America in 1990. I actually worked as an assistant to the janitor, but I pumped my resume a little bit, as you do… I started selling real estate in 1993; it was suggested that I should give up, because I was awful, and I stuck with it, and by the end of the ’90s I’ve sold probably around 200 million dollars a year, with an average price of 350k, which was long before the million-dollar listings. [unintelligible [00:03:59].08] and then I founded a company called Sussex & Reilly, which at the time was quite cool, which sounds like I was good at Rubik’s cubes, but we were the second largest users of Blackberry’s in North America in 2000, when they were cool. I sold that company, and bought it back and sold it again. That’s kind of the gist of it.

Joe Fairless: I wanna dig into – from 1993 (when you started) to 1999… I’ve read a couple articles where you were interviewed around that time, and you attribute it to hard work. I wanna dig in there… So if we drill down a little bit, what would you attribute the rise in your success as a real estate agent to?

Sean Conlon: Look… Obviously, there are lots of incredibly smart people out there; they’re definitely a lot more smart people than me, a lot more connected, and I think it’s somewhat inspiring, but my story is I’m an ordinary person who did some fairly extraordinary things. What would I attribute it to? It really was hard work, because I had nothing else. I had to work my day job, finish up at six at night as the assistant janitor, and then come and cold call in the brokerage office. But I ate sleep and drank real estate in a particular area, and I was so knowledgeable…

It was like learning to juggle, which seemed like a useless talent. I knew every zoning, every lot size… And then one day, when all those nights fell on top of me, I was able to juggle my way through it. I was positioned they started to build the first three condo units in the neighborhood, and I rode that wave. But I was only in the right place at the right time, because I was in that place all the time.

Joe Fairless: So you were working as an assistant janitor, and you were also painting some houses… But there were people in your brokerage – just for some comparison purposes – who were working full-time. When I hear that, it’s not about necessarily doing hard work, it’s about being effective with the work you do. Because if you’re working only nights, then you’re basically working about the same hours as the people who are working full-time, therefore you are more effective with your time. So what were you doing that was more effective with your time?

Sean Conlon: Bingo! I see why your podcast is so successful – you focus right in on the difference. I was incredibly efficient with my time, and I picked something and focused on it. America’s such a huge, huge country, economy-wise. If you pick a small part — Sussex & Reilly when I started it, two years in we were doing a billion dollars in sales a year, in a couple of neighborhoods. I focused in on understanding the teardown and the zoning in this neighborhood, [unintelligible [00:06:43].06]. That was my talent that I taught myself that was useless, until it became incredibly relevant.

So that’s exactly right, I was focused on working a lot. There were a lot of people who worked who did busy work; I would come in at night and I would need so many hours to be focused… And I would cold call, which is a horribly difficult thing to do, but it taught me rejection really isn’t rejection if you pick yourself up and go again.

Joe Fairless: How did you go into focusing on teardowns and zoning, compared to other stuff you could be focused on?

Sean Conlon: That would be some serendipity. Of course, that comes along if you’re out in the mix. I would walk the neighborhood in the evening, and I saw a guy building a three-flat, three apartments, and I asked him what if he’d sell them as condos, and he said, “Well, they don’t buy condos up in this neighborhood.” I said I’d do all the research-research, and I sold them in a week from like some really bad photocopied plans, and like “This is the future”, and I rode that wave.

Joe Fairless: So you came to the U.S. in 1990. How old were you?

Sean Conlon: I was 21. I grew up in a small village in Ireland, seven of us in a pretty small house. My dad was the most incredibly charismatic man ever, but the worst businessman ever, and my mother was hardcore, raised the five kids and she worked two jobs, so I got a little bit of both. But my dad was a dreamer, and he always believed that American was the place where you could go make it, and when I look at him – he’s dead now, and he was my inspiration – I think he’s a great example of “In the end you only regret the chances you didn’t take.”

He wanted to come to America, but he was scared to, so he put all of his faith that I was going to do it. I was 21 when I came.

Joe Fairless: What’s the reason, why are you such a hard worker, but so focused?

Sean Conlon: As lots of Best Ever listeners will probably attest to, we see all these wonderfully dramatic things, and I think one of the reasons The Deed: Chicago will appeal to people – I’m so very real; what I mean by that is I have always been driven by fear. While lots of people are driven by the things they want, a lot more of us are driven by fear: fear of being poor, fear of not being able to pay your kid’s school bills, or the car payment. That does drive a lot of us.

Ultimately, it drives you to real success, but I would be lying if I said I was driven by some great vision to be in the White House, or something like that. I was driven because I was scared, and I wanted to take care of my family, my parents and stuff, which is the greatest thing I’ve ever done.

Joe Fairless: I would think at this point you are financially stable, but you’re still achieving high-level things. Is fear still driving you, and if so, what are you fearful of?

Sean Conlon: Fear’s still in me, because in 2008 I was on top of the world, and I was not paying attention, and I was probably in a hammock when that bomb hit the beach… I was like, “Oh my god, where is everything?” At that point I had a hundred-million-dollar fund on the street; we were funding 1.2 billion dollars of developments across North America… So there’s still some fear, but I’m an ambitious fella at the same time.

Joe Fairless: Got it. So are you still doing developments right now?

Sean Conlon: I own a lot of stuff I’ve taken back in the downturn; you’d asked me about some of my funds, and it’s interesting because when I describe my mezzanine fund as a success, it was the return of investment, not return ON investment.

A lot of that real estate – like hundreds of acres in North Carolina – I still have, but I’m not out there balls to the wall developing, because that’s not a part-time gig, as I tell people on the show.

Joe Fairless: Right. Outside of the show, what are you focused on from a real estate standpoint? What are your main responsibilities right now?

Sean Conlon: I’m the chairman of Conlon & Co. We have a residential brokerage that probably [unintelligible [00:10:51].25] that will do about a billion dollars in sales this year. We have a commercial division which I really like to dip in and out of, where we do commercial deals around the country, and that’s probably a three, four hundred million dollar business, and then the really cool one is the capital markets aspect of my merchant bank. That’s where we structure about three-quarters of a billion dollars of loans a year for developers, guys refinancing storage facilities, senior housing, apartment buildings… They’re my main business. I’m kind of the rainmaker.

Joe Fairless: You’ve got agents for both residential/commercial, and you’re also making loans to people who want to buy real estate – primarily commercial, I imagine.

Sean Conlon: Yeah, and they’re bigger loans, CMBS loans. I do buy my own opportunistic things; I bought a high-rise site last year, a hotel in downtown Chicago. So I’m not afraid to be in that, I just find that market is quite heated right now.

Joe Fairless: Can we talk about that high-rise in Chicago for a second? Can you tell us the numbers on it and what appealed to you and how you found it?

Sean Conlon: Absolutely. Firstly, sometimes some of the best deals are hiding in plain sight. I say that just to state the acid obvious… There is a giant frog on it – it’s the Rainforest Cafe in downtown Chicago; the ugliest building ever, and there was a giant gorilla outside. I’d driven by it every day, all of my real estate life. I hear there was a play, there’s seven owners, they’re all in their 80s, they won’t talk to each other. That in itself is something [unintelligible [00:12:24].20] but I got involved talking to them all; a lot of people passed on it because they were like “There’s only a five year on the lease, and it’s $830,000 in income, and then what happens when it ends?” Well, nobody stopped to think it’s the land play where you get $800,000+ of income, because you can put 20 storeys on top.

So I bought it for just under 14 million dollars, with the air rights from which you can build above it. In five years — of course there will be dips in the market, but if you average it out, in 5-7 years, that’s a 40-50 million dollar site. It was sitting in front of everybody in the business who was much smarter than I am… But I drive around and I look at everything, and I look at it twice.

Joe Fairless: I wanna make sure I understand that, and sometimes I ask people to speak very slowly to me, so I can make sure… You explained it perfectly, but I wanna make sure I’m understanding this right. You bought it for 14 million, and included the air rights so that you can build above it and develop above. After developing that, you’ll have an asset that’s worth a lot more than what you’ve bought it for, right?

Sean Conlon: I will elaborate and be a little more specific. Right now, the Rainforest Cafe is in the bottom.

Joe Fairless: Okay…

Sean Conlon: When I redevelop it, I will have two storeys of retail, and then probably 15-20 storeys of apartment buildings or a hotel. I’m saying the land is worth 40-50 million in 5-7 years.

Joe Fairless: Oh, the land will be worth it just because of appreciation, or…?

Sean Conlon: You can build the building on top of the reason right now; the value wasn’t there, nobody was willing to buy it and sit on it. They wanted it to be shovel-ready. One piece of advice I would give to your listeners is nobody thinks long-term on anything, because we’re so used to instant gratification. If you can take a long view, as I believe you do in your investments in real estate, time is always your friend in real estate if you finance it properly.

Joe Fairless: Right, that’s they key, too – financing it properly. Does the property for you cash flow in those years leading up to…?

Sean Conlon: We had to put 50% down; I bought it with one other partner. We put 50% down, so it was a real cash commitment; we put seven million dollars down. But it covers everything, cash flows, it’s a real nice hold, and then in four years time it’s an incredible location. It’s the corner of [unintelligible [00:14:54].08], opposite the Rock ‘n Roll McDonald’s, for those of you who’ve been through Chicago. It’s fantastic real estate.

Joe Fairless: So you’re saying you bought it for 14, you put seven into it, you’re cash flowing, and then in five years you are going to develop it?

Sean Conlon: Well, I will probably have somebody who’s much more competent than me develop it. I will [unintelligible [00:15:16].01] it and roll it in at its new value.

Joe Fairless: And you’re projecting it will appreciate from 14 to – just the land – 50 million because of… Why?

Sean Conlon: Well, because once a tenant is out of there and it’s unencumbered, you have a high-rise site in downtown Chicago. I’ve already received offers of 25-30 million. It’s amazing how short-term people are; two years ago they wouldn’t buy it, because the tenant was in there for six years. Now they’re like “Oh my god, we should have bought that.”

Joe Fairless: I’m with you, I completely understand now. Thank you for walking me through it. So because the tenant lease will be gone in five years, then you’ll have a high-rise — it’s like a blank canvas, and it does cash flow along the way. That, from my experience, is where people get into trouble with development – and fix and flips in particular – when the music stops on the landing and the home values and you don’t have something that cash flows and you can’t cover your expenses… That’s where you can get into trouble.

Sean Conlon: I’ve gotten burnt like that. When you’ll see The Deed: Chicago on CNBC — I made those mistakes in the past, so when I’m teaching people now, it’s not that I’m that smart, I’ve made all those mistakes. I’ve had lots of land, I had thousands of acres of land that was great, until it wasn’t; no cash flow, and when the banks wanted it paid off, I had to.

Joe Fairless: Would you still buy land, knowing that’s the case, knowing it’s open to risk like that?

Sean Conlon: When I bought the land I had no focus; I was focused on 20 different things, which is advice I would give to your listeners also… Because I suspect if they’re the Best Ever listeners, they’ll hear these things. I would never rule land out. If you’re thinking long-term, and it’s agricultural land or it really is development land, properly financed, and you can manage a couple of ups and downs on it, you’ll still be okay… But having cash flowing assets is such a safe way to go.

Joe Fairless: You’ve mentioned “properly financed” a couple of times… I wanna make sure I understand – what does that mean?

Sean Conlon: It generally means – and I’m gonna make it very basic; I’m not going into all sorts of complicated stuff, because I’m not that complicated. You can’t have the thing levered like where you take out a 90% loan on it. Most of my real estate always had about 50% equity in it anyway. Now, in the world [unintelligible [00:17:37].10] that nearly wasn’t enough. So don’t pull a load of money out, don’t have it levered up to 90% of the value. Leave the equity in there, because you’ll come to a point otherwise where you’re going to be writing checks, which will freak you out.

Joe Fairless: Do you have your own rule of thumb for a property or some land that if you were to buy it, the type of leverage that you would do now?

Sean Conlon: Listen, I still think 50% is really safe. That was always my rule of thumb. I think what we didn’t expect in 2008 was that the banks would fail in front of us and you would have predatory hedge funds buying the loans and coming after you. Nobody accounted for that.

Joe Fairless: Yeah, that makes sense. One thing that I personally have so much respect for are immigrants who come to the country, and… You knew English, but sometimes they don’t know English and yet they excel to a much higher level than those around them born in the United States, who have seemingly so many opportunities right in front of them and have a competitive advantage over people who don’t even know the language, or in your case, don’t have the network established within a community, whereas you had to create it. Do you believe there’s any excuse for not reaching as high of a level as you’ve reached for others?

Sean Conlon: None. I grew up in a world that everybody wanted to come to America. Heads up, it hasn’t changed. The most talented and ambitious people in the world want to come here. It wouldn’t be a bad thing… It would keep some of us locals — because obviously our kids will be Americans, it will keep them on their toes a little bit, sharpen the competition.

I would go to the library in our village — obviously, had your podcast been around at the time, I would have been one of your Best Ever listeners also… But we didn’t have a phone when I was 14. I would go to the library and I read about Carnegie, Vanderbilt, Rockefeller. This was the America I wanted to come to, so I came with an outside attitude to a place that I felt comfortable with in my head, because we all grew up in it: John Wayne, Clint Eastwood… The world grew up in Americanism; it shouldn’t be turned into a negative thing.

There’s still no greater place than America to be what you want to be. It is unbelievable, and people need to shake themselves off. There’s nothing like it in the world for business opportunity, nothing. It hasn’t changed.

Joe Fairless: You mentioned earlier something about instant gratification and how really we should take the long view with our investments. Is there a way that you teach people so that it resonates, maybe showing them what you do, or just giving them examples of your past investments?

Sean Conlon: It’s so hard. You can’t teach experience, you really can’t. I wish I knew 20 years ago what I know today. I know you have a lot of apartment buildings. I sold some incredible real estate, because I wanted to take the hit now… It’s hard to teach that, but if people would take a breath — I’m an overnight success in 25 years. Seriously. I slog along, I got knocked down… I tell people, you only fail when you stop trying. You should see how many times I went “Oh my god, I didn’t just do that…” But I only do it once.

I tell people, “There’s very little to be learned from the second kick from a mule.” [laughter] So I’ve been kicked a lot, but once. I preach patience, but it’s something people have to learn.

Joe Fairless: What do you do consistently, ideally every day, but if not every day then every week or on a regular basis, that gets you to where you wanna be professionally?

Sean Conlon: So what has, because my life now is a little bit like a pinball ball, I bounce from place to place and thing to thing. But when I was focused on the acquisition of real estate, every day I would walk the neighborhood, drive around the neighborhood, get a feel for what’s going, if something new is going on… I would talk to everybody. There’s a reason during wars spies got in talks with the local population. It’s amazing the information you can gather on the street. I would talk to everybody in the neighborhood you wanna work in.

Joe Fairless: When you have those conversations, what information are you looking for and what type of questions do you ask?

Sean Conlon: Well, first you have to be kind of polite and subtle about it; it should be conversational. “What’s going on down the street with Mr. Jones’ house? Oh, I see they’re doing some work in there… What’s going on?” and people invariably tell you. I bought a 260-room hotel, which subsequently became my worst deal ever, because the doorman mentioned that there was a grouping from New York running valuations on it… Because I used to chat with him every day to see what was going on in the neighborhood. That’s a bit of information I didn’t need, in hindsight. [laughter]

Joe Fairless: Let’s talk about that hotel for a second, and then I want to talk about some fix and flip stuff, that this show revolves around. That hotel – can you elaborate on the deal?

Sean Conlon: Yeah, it’s a perfect example of — I had an incredible trajectory upwards. I went from being assistant janitor to probably being the top broker in North America in like a six-year period. So I’m running around, I get the heads up on this deal, buy a 260-room hotel in downtown Chicago. Now, they say in Latin “Nihil admirari” – be surprised by nothing; don’t get too confident, there’s always something that might come out of the blue and sucker-punch you.

Well, 11th September happened a couple of weeks before we closed, so we were hard on the money. We turned down a flip on it; we bought it for 17 million and we turned down a flip on it. Now in hindsight, I had gotten out of my lane. I used to run cross country high school, and the guy who used to coach me always said “You run your own race.” I was like, “That’s a stupid statement. Of course I run my own race. Who else is running it?” But what he meant was I looked at the finish line; I didn’t look behind me, I didn’t look left of right… If you compare yourself to other people, and if you look back – which there are no lookbacks in life – you will perpetually be unhappy. There’s always somebody with a bigger boat, a bigger jet.

So I stopped running my own race and I was looking around at all these guys who were in hotels and funds, not realizing I was incredibly successful in my own arena. I decided I was going to be a financier/hotel guy, and I knew nothing about hotels. It was a nightmare, and it nearly strangled me. But I got up every day and went back at it until I got out of it.

Joe Fairless: You bought it for 17 million… What did you turn down the flip for? How much did they want to pay?

Sean Conlon: Well, we probably would have made three or four million on a quick flip, which is an amazing amount of money, but I’m only telling you a little part of it… I was also on the hook at that stage because had started a construction for a 70-million-dollar loan.

Joe Fairless: Yeah, that’s a big number.

Sean Conlon: That’ll do it. And my partners had decided they didn’t like being on that loan, so they would not go with me; I mean, “Yikes!” You’ll see it on my show, it’s something like “No, you cannot be on the loan… You are!”

Joe Fairless: What ended up happening with the hotel? What did you sell it for?

Sean Conlon: I ended up – it’s quite interesting… Two years of hell, and there was a partner who really wanted the deal, so he bought me out from my equity. He was an incredibly wealthy person… I think he subsequently lost tens of millions on it, but he could afford it, and he wanted it.

Joe Fairless: It helps with taxes.

Sean Conlon: Yeah, so I escaped, but the lesson for your listeners is stick to what you know, and be the best at what you do. Don’t try and be good at lots of things, that was my big father.

Joe Fairless: What aspect of real estate do you know the best, and within that what are you best in class doing?

Sean Conlon: Here’s what I would tell you I do: I connect the dots on a deal like nobody, so opportunistic acquisition, commercial or residential, I do. But my real skill is people. I can read people, I know who to connect to who, and that’s what a real merchant bank does. I get paid for putting together funding, I get paid for putting together deals, and I take a piece of them.

So what am I best in class at? I can connect people from one end of the globe to the other; with a couple of thoughts, I can connect all the dots. That’s what I do. Actually, to go back to when I was a broker, what set me apart from everybody, by ’96 let’s say you were coming home from your accountancy job, and you’re like “I wanna be a developer.” People say, “Go see Sean Conlon”, so you would come in the door, I would have a set of plans for you, I would have a piece of land that I tied up, because [unintelligible [00:26:35].24] I would have a GC for you, I would have the bank that would fund it, and obviously the brokerage that would sell it. I was one-stop shopping.

So you’re walking home, coming home to your wife, “Hey honey, I got a puppy.” “Hi honey, I dropped in to see Sean Conlon and I’m a developer.” Hundreds of people I made developers in Chicago. You can come in the door and leave with everything.

Joe Fairless: For better or worse… [laughter]

Sean Conlon: Well, listen, the great thing about it is there was an incredible upsurge at the time, so anyone who did business with me from ’96 – and I retired from selling in 2000 – everybody who did this with me (except the complete idiots) made it.

Joe Fairless: [laughs] I wanna ask one more question about the hotel thing, and then I wanna talk about fix and flips. You said that the lesson there is stick to what you know…

Sean Conlon: Yes.

Joe Fairless: That leads me to believe that you weren’t an expert in hotels at that time. The purchase price was 17 million dollars – was that all your money, or did you bring in partners?

Sean Conlon: We financed that, myself and one other partner.

Joe Fairless: Okay, so you financed it, that’s what I thought; you financed it yourself and one other partner. And I’m not asking this question for Best Ever listeners to go out and convince people to invest in things they don’t have experience in, I’m gonna ask this question because it’s going to be interesting to hear how you were able to basically sell in a project where you weren’t an expert in that category. So how did you sell in the project to your other partner, even though you didn’t have an expertise in hotels?

Sean Conlon: My other partner had done some deals. Secondly, the real estate was incredible real estate. Thirdly, the plan was actually not to be a hotel, we were going to convert it to condos, and I was best in class there.

Joe Fairless: Got it.

Sean Conlon: Being the genius 30-year-olds that we were, we were like “Let’s run it as a hotel for a year, what could go wrong?” We were losing 800-900k/month. Does that explain it?

Joe Fairless: Yeah, that’s good. Alright, so now let’s talk about fix and flips… That’s what the show is focused on, right? Fix and flips.

Sean Conlon: The show is basically The Deed: Chicago, and it’s on this Wednesday on CNBC, so I’d love your listeners to check in and see it. It’s basically people who go out and think they can do flips, and get over their ski tips and pitch me to borrow money off me… But not just money, my expertise to get them out of the bind. That’s what we do.

It’s a lot of fun, this show. People really enjoyed the first episode last week. It’s quite lively.

Joe Fairless: And it’s Wednesdays at what time?

Sean Conlon: 9 CET.

Joe Fairless: 9 PM CET, so 10 PM Eastern on CNBC, Wednesday night. We will tune in for that, we’ll even have a little watching party. What’s the most ignorant thing – it doesn’t have to be on the show, but just in general – that you’ve seen a fix and flipper do, that you’re like “What the heck are you talking about?”

Sean Conlon: Oh my god… They’re too numerous to list. People never cease to amaze me with how stupid they are. If you look at YouTube and you’re thinking “That’s the most stupidest thing ever”, then you get into property flipping and you’re like “You’ve got to be kidding me!”

This week – to give an example, and it’s an interesting story… I actually turned out to really like the guys, but they bought a property at auction — this is not the most ignorant, but it’s fascinating… They bought a property at auction, and they were driving by admiring the property, and then eventually a woman appeared and said, “Get off my lawn, this is not the house you bought!” They bought the wrong house, it was the one across the street. [laughter] It’s hilarious, and I love the guys… You should see me on the show, I’m like “Are you joking me?” I was gobsmacked. They bought the wrong house.

Joe Fairless: They were fixing up her house, even though…

Sean Conlon: No, they were staying in front of it, admiring it, getting ready for the closing and everything, and it was only too late they realized that that was not the house… It was the ugly coffin across the street. [laughter]

Joe Fairless: That’s great. So I watched Shark Tank…

Sean Conlon: It’s great you can watch Shark Tank on Wednesday, and it leads right into me.

Joe Fairless: Yeah, I’ve seen your ads where I guess it was advertising this one particular thing; you would tell the back-story on that, so I’m glad that you did.

Sean Conlon: Yeah, but I’ve seen just so much stuff… Listen, I still think flipping is the greatest path for your average American to build an empire, there’s no question about it. I say this all the time, so I don’t need to be repetitive – the odds of you or I becoming Zuckerberg or Michael Dell… We have a better chance of getting hit by a meteorite right now, than Giselle coming and picking me up and bringing me home. It just doesn’t happen. That’s a 0,0001%. We could go out and make it flipping, but we will make mistakes.

Joe Fairless: What do we have to have as a skill set to make it in flipping? Because I personally think I would be disastrous at flipping homes… Just disastrous. What do we have to have as a skill set to be excellent at flipping?

Sean Conlon: I suspect you’re being modest. First things first, as Johnny Cash used to say, you need some growl in your belly, because flipping is a scary rollercoaster of an experience. But it helps — let’s say you have a partner, or you have some construction skill (maybe you’re a carpenter). But don’t be a designer! Nobody cares about your Versace wallpaper. You’re not an interior designer.
This is what I tell people all the time – you’re fixing a home as generic and beautiful as possible to flip it. It’s good to have an understanding of maybe a construction trade, and if not, a fantastic GC. The GC is so important, and I talk about that all the time, because that’s where most people fail. They get ripped off by the GC.

I would also say you have to have a real attention to time management, as you touched on earlier about my work ethic. Don’t do busy work; you’re gonna give schedules. Remember, a flip will kill you because it’s time-sensitive. Investment time is your friend, a long-term investment. They’re very different.

Joe Fairless: You mentioned earlier “Think long-term” and you just mentioned it again, have a long view with your investments, but a flip is not a long-term investment…

Sean Conlon: No, a flip is how somebody like me got my initial equity to do these deals. I would love to have rocked into the marketplace and bought apartment buildings with a long-term view; that’s the dream, retails rentals. But I needed the equity initially, so I did some flips because I understood the arbitrage; I was between the land and people who needed it. That’s where I got the initial equity. I did fix up houses; that was how I got my equity.

Then when I had enough, I would buy some apartment buildings and some retail, because that is what you will retire on.

Sean Conlon: Think long-term. Take your time, stop looking at what everybody else is doing, run your own race.

Joe Fairless: I’m gonna use that quote from your cross country coach many times, I like that. Are you ready for the Best Ever Lightning Round?

Sean Conlon: Yeah, I think I am.

Joe Fairless: Alright, I think we’ll do it then. First, a quick word from our Best Ever partners.

Break: [00:34:01].03] to [00:34:43].08]

Joe Fairless: What’s the best ever book you’ve read?

Sean Conlon: I love City of Thieves, because it’s ironic, it’s fabulous and it’s short, but one other I have to mention – The Wright Brothers, because it’s America. These two guys in Ohio said “Hey, we’re going at the field tonight to learn to fly.” [unintelligible [00:34:56].07] said “These guys are complete lunatics.” They learn to fly. Love it! So American!

Joe Fairless: What’s the best ever personal growth experience and what did you learn from it?

Sean Conlon: It’s my saddest and it’s also the best ever… My father dying at 56 in 2000. He was the reason I did everything I did, and it taught me that we’re here for a nanosecond, so try and enjoy your life also.

Joe Fairless: What’s the best ever deal you’ve done?

Sean Conlon: The best ever deal I’ve done are the two deals I didn’t do in 2007. I was going to build two high-rises. I had everything lined up, the hundred million dollars in financing, and for some reason I didn’t do them. I’m not going to say I saw it coming, because I got dinged in a way, but those two – I’m like “This is too much. It scares me. I’m not smart enough to do it.” They were the best deal I ever didn’t do.

Joe Fairless: Have you done a project of that size since?

Sean Conlon: I’ve taken back projects of that size. I know you’re from Texas… We took back a 22-storey tower in Austin, which ended up being a great deal for us. I took back 350 units in the hills in Austin, Texas, which turned out to be great. So yes, I’ve not built them, I’ve taken them back.

Joe Fairless: And taking them back you’re referring to you’re the lender, they didn’t pay their debt service so you get the property. Got it. When you take it back, what’s your business plan with it?

Sean Conlon: Pray. [laughs] We took these back after the crisis. We had no plan on them. Like I said earlier, our business plan was like a pinball ball, we bounce from crisis to crisis, but we took back assets we believe in, and subsequently then had to start over, roll our sleeves up and get them finished, and they all worked out really well. But time… It was a six-year process.

Joe Fairless: What’s the best ever way you like to give back?

Sean Conlon: A couple of things. I obviously was very good to my father; the first cool thing I ever did was buy him a Mercedes for Christmas, because when we were young he used to bring us up and look in the dealership window and point out that that was for some rich guy… So on Christmas when I was about 25, 26 we went up there and I bought it from the one that was sitting in the window.

I have a Wildlife Foundation, and while this might sound slightly self-promoty, I think The Deeds: Chicago – I give back knowledge I’ve learned to people all over the country, which is great… But my Wildlife Foundation is my passion, animals.

Joe Fairless: What would you say – and we’ve talked about some – is a mistake you’ve made on a particular deal?

Sean Conlon: A mistake I made on a particular deal is — there’s an expression I use quite regularly, “Trust, but verify.” I was told the zoning was such, and the guy told me it with such a sense of belief, I forgot the fact might have been a sociopath, so I bought something that was not zoned appropriately. Yikes! I thought I could put 25 units on it, and they could put four or five.

Joe Fairless: Lastly before we wrap up, is there anything else that we haven’t talked about that you wanted to mention to the Best Ever listeners?

Sean Conlon: I would just say to the Best Ever listeners, first thing in real estate is invest long-term. Listen you to your podcast, because I can tell you have figured a lot of this stuff out. You’re obviously quite modest about it. B) Don’t panic, because when you panic, you lose complete control. Take a breath and step back. In the First World War there was a great expression – “Stay alive till the morning, because some day maybe the war will end and you’ll be fine.”

Don’t panic. If you’re having a terrible day, go home to bed and get up; it won’t seem as bad, and you’ll work through the bits and pieces… Put it into little chunks. Don’t panic. Real estate in America is still the greatest way to become a multi-millionaire, no question.

Joe Fairless: Where can the Best Ever listeners get in touch with you and learn more about your show?

Sean Conlon: I have a website, seanconlon.com, and I have an e-mail there and phone number and stuff…

Joe Fairless: Outstanding.

Sean Conlon: And I’d love them to watch the show on Wednesday night, The Deed: Chicago on CNBC.

Joe Fairless: When we watch the show and we’re enjoying it, is there anything you’d like for us to do? Should we tweet CNBC, should we…?

Sean Conlon: Absolutely. I’m understanding anything like tweeting, I was very flattered that the Rancics tweeted on this show, and all sorts of people like that. I met Bill in ’96, before he began the apprentice, when he warming to real estate and he came to sit with me, and he became my tenant. So that was exciting… He understands this show, and lots of other people, so tweeting CNBC, getting the vibe, and share it with other people. Say “Hey, check this out!”

I spoke on CNBC in the morning, on the morning/breakfast show there, about glass hammers, which is a joke… We used to send people out to buy glass hammers. Well, you obviously don’t get glass hammers, so it was a fun interview that you will be able to dig out, too.

Joe Fairless: Sean, I thoroughly enjoyed our conversation. This was a conversation about being focused and being effective with our time. You talked about how you were the not janitor, but assistant janitor, and you were also at night doing the real estate agent stuff, and ultimately you were able to get some deals done, being focused on teardown and zoning as your area of expertise… Having conversations in the neighborhood, talking to them about what’s going on in the neighborhood, every day walking/driving in the neighborhood, and then evolving from there, becoming right around 1999-2000 200 million dollars in sales, and then going from these large projects – most recently buying the high-rise site in downtown Chicago…

I love the story of how you approached it with the seven different owners that wouldn’t talk to each other, and the tenant that’s got this five-year lease, and your approach to be conservative too, putting down 50% of the 14 million. Seven million – that’s a large chunk and great leverage for you that cash flows while you wait and do your long-term play with it.

And then the cautionary tales too, of the 260-room hotel in Chicago, along with some of the other things we talked about. I’m really grateful… As I mentioned earlier, I don’t think anything inspires any more than immigrants who come to the U.S. and just do phenomenal things, and you certainly are at the top of the class.

Thanks for being on the show, thank you for having this conversation!

Sean Conlon: Thank you for having me on this show. Obviously, this show is fantastic, I read all about it now. I’m now a new follower. And thank you for appreciating immigrants. I love America, I’m an American citizen now, and I’m talking to you today from my beach house in Malibu that I bought with commissions I saved 15 years ago, and that was as an immigrant. I had an account with my commissions saved in it. That’s America

Joe Fairless: That’s America, baby. Thank you so much! I hope you have a best ever day. We’ll talk to you soon.

Purchase, rehab, rapid pay-down and refinance 5 properties in 7 Years! Whew! Before you think it’s impossible, turn up the volume and listen to our guest. He’s extremely motivated and driven to find the right lender and the right properties, it is possible.

– Real Estate Investor & Founder of Chicagocashflow.com
– Chicago’s # 1 Flipping Team
– Radio show host of Real Estate Live with Andrew Holmes on AM560
– Have over 160+ rental properties
– Idea of investing is based on 2-5-7 Cash Flow For Life; In 2 years 5 properties and 7 year payoff
– Based in Chicago, Illinois
– Say hi to him at http://www.chicagocashflow.com/
– Best Ever Book: Rich Dad, Poor Dad by Robert Kiyosaki

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluffy stuff.

We spoke to Barbara Corcoran from Shark Tank, Robert Kiyosaki, the author of Rich Dad, Poor Dad, Jay Papasan, the co-author of The ONE Thing with Gary Keller, and a whole bunch of other best-selling books.

With us today – Andrew Holmes. How are you doing, Andrew?

Andrew Holmes: Doing great, how about you?

Joe Fairless: I’m doing well, nice to have you on the show. A little bit about Andrew: he is a real estate invest and founder of ChicagoCashflow.com, which is Chicago’s number one flipping team. He’s the radio show host of Real Estate Live With Andrew Holmes. He has over 160 rental properties and based in Chicago, Illinois.

With that being said, Andrew, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Andrew Holmes: Sure, so my background was a real estate agent since I was 19 years old until about 33-34. In 2008 it was the first time I started with flips. For a couple of years I had done well as a real estate agent, but I kind of found myself on a treadmill, so I switched to flips, which worked out quite well in 2008, 2009, 2010, but what I found was I had traded it in for a bigger treadmill. It was kind of a rational sort of a business, and I didn’t want transactions, I wanted investing.

In 2011 is when the focus shifted to about 60%-70% of all properties that we touch today go into a rental portfolio. The key is that it needs to be paid off in 7 years or less. That’s basically what we focus on today.

Joe Fairless: Did I hear that right, you pay the properties off in seven years or less?

Andrew Holmes: That’s correct.

Joe Fairless: So you own your properties free and clear within seven years, that’s the goal…?

Andrew Holmes: That’s the goal. We use a formula we call 2-5-7 – that’s kind of where it started. In two years how do you accumulate a minimum of 5 properties and get them all paid off in 7? You can do that 2-10-7, 2-20-7… The formula doesn’t change, it’s just the number of properties, how much cash flow do you wanna create a month; you scale based on that.

Joe Fairless: And please educate us – how do you in two years get five properties and have them paid off in seven?

Andrew Holmes: Most people, whenever they own rental properties, they tend to buy rental properties in areas that are rather challenging. We have a different philosophy, which is we tend to buy in bread and butter areas, right next to what we would call premium areas. Basically, if premium areas are A, we tend to buy B- or C+ category areas.

The other requirement is whenever we’re buying a property, after rehab it must have a minimum of 25% equity. Also, it must have [unintelligible [00:05:04].03] We focus on buying small three-bedroom, one and one-and-a-half bath ranches. They must cash flow to the tune of 400-450 dollars/property after all expenses, including management.

The biggest challenge people have is that they try to invest in properties with residential loans, and the scale at which they can grow is hampered, because you need seasoning on those, you need all those types of issues. What we always do is we buy them with commercial loans. Basically, a five-year balloon with a 25-year amortization type of a loan; it’s a commercial loan at five, five and a half percent. The speed at which you can scale and grow is much faster, and the seasoning requirements [unintelligible [00:05:52].01] so you’re borrowing money to buy the property, you’re borrowing money to do the rehab, and then you’re going to a commercial lender, refinancing it and then putting the money back to do the second one, the third one, the fourth one and the fifth one.

Joe Fairless: There’s a couple keys here: one is finding the properties that meet the criteria that you just mentioned, the other is having the lender lined up that works with you on that. Let’s talk about the lender real quick; who do you use for the commercial loan?

Andrew Holmes: For commercial loans we typically tend to go to the small banks that are in town. Every town has like a small X, Y, X bank or trust type of a bank. Typically, they have anywhere from one to five, ten, fifteen, twenty ranches. That said, we’re not gonna go to Chase Bank and we’re not gonna go to the big lenders, because they don’t really offer these programs for small investors. So typically, we tend to go to them.

B2R – your listeners might have heard of them… That’s another place. Their rates are a bit high compared to local banks that we can find, but typically they’re local, small banks. Every community in America has those.

Joe Fairless: Let’s say we know a community bank or credit union in our area – we definitely do. When we walk in the door, who do we ask for and what questions do we ask.

Andrew Holmes: That’s a great question, because you always wanna go and directly talk to the VP. Typically, at these small banks the VP is pretty much the main guy there, and that’s the person you wanna approach. You do not wanna talk to a residential loan officer, because that’s where the teller or somebody at the front is going to try to push you to, because that’s really what they’re familiar with. But you really wanna go directly to the VP of the bank.

What you wanna tell them is that we’re looking for properties that are purchased, rehabbed and they already have a tenant in them. So they’re stabilized properties when we go to these types of lenders, and there’s cash flow that comes in. As you know, that covers a ratio of about 1.25, but our minimum standard is that every property that we take to them has a minimum debt coverage ratio of at least 1.5, 1.6, 1.7, so we’re well above their thresholds.

First they have a hard time believing that you can even do these numbers, but once they look at them and they see you have a nice equity position, they will tend to give you 70-75% (in some cases 80%) of appraised value.

If it’s okay, can I give out some numbers, so that listeners will get a little bit better idea?

Joe Fairless: Yeah, I love it.

Andrew Holmes: Okay, great. Basically, let’s say you’re buying a bread and butter property, three-bedroom, one bath ranch for $65.000. You’re gonna put $20.000-$25,000 into rehabbing the property. You have another carrying cost of another $5.000-$6.000, so you’re all in cost into the property is somewhere around $90.000. This is the most critical part, which to me is investing, versus what most people do, and that is the property needs to appraise on a conservative refinance appraisal for $120.000-$125.000-$130.000. That’s the key thing – that’s the only way you’re gonna be able to get all the capital that you put into the property out, so that you can efficiently recycle the same money over and over and over.

So the property appraises for about $125.000. The lender is gonna give you about 75% of appraised value. We can get more technical with it, but for starting out purposes, that’s the key thing. That’s the benchmark people have to look at. If the property appraises for $120.000-$125.000-$130.000-$135.000, now they’ll give the $90.000-$95.000 refinanced.
So you put that loan, you pay your first lender off – the lender you used to buy the property and to do the rehab – and then you just recycle the same funds. Or if it’s your own money, that’s fine also, but you just repeat that process over and over and over, goal being you need to get to a minimum of five. Obviously, 10 is better, 15 is even better, but five is the critical number.

Joe Fairless: With the questions… Going back to walking into the bank, and we are in front of the vice-president, and we are asking the questions about the minimum debt coverage ratio that they look for and what we’re anticipating… You went into some of the business plan, which is great, and it helped clear things up a little bit – or at least, not clear things up, but paint the picture… What specific questions would you ask of him or her as the vice-president so that you get the answers to what you’re looking for?

Andrew Holmes: What we’ve always done is when we walk in, we tend to describe them really briefly (in two minutes or less), kind of an elevator pitch as to what we do. What I typically say is “Hey, we’re buying foreclosure type of properties or investment properties that are rentals. When we come to you, they’re gonna be purchased, they’re gonna be already stabilized – they like that word – there’s already an existing tenant. We do two-year to three-year (minimum) leases only; we don’t do short-term leases” and we explain to them why and what the philosophy is and how we wanna aggressively pay down properties.

First, they’re kind of shocked, like “You actually do this?”, and then their head starts nodding as you start getting into more technical issues, which is “I know typically most banks look for 1.2/1.25 debt coverage ratios. Any property we bring to you is gonna have 1.5/1.6 debt coverage ratios”, and we’ll show them a couple of actual examples. If you’re brand new, just show them a property of two maybe that you have in the works, that you plan to do.

The key thing to understand is a lot of these small banks will have a footprint in an area. Let’s say in X, Y, Z community – they wanna lend in a community that is typically around that area. They’re not going to go in a big city like Chicago — if a bank in the Southern part of Chicago, typically they’re not familiar with the North Side. They might say, “Yeah, that’s a market, but that’s really in our footprint.” That is key to understand – where you ask them to lend is also a very critical piece whenever you talk to these lenders. A lot of times, they’ll be able to tell you yes, that is something that they would be willing to look at.

Now, some banks, when you go to them they’ll say, “Well, we won’t do the rental part of it, but we’ll do the purchase. We’ll help you on that end.” Or “We don’t really wanna do onesie-twosie loans, we want a minimum of 5-7 properties at a time.” So it just depends on what the appetite of that bank is.

Back in 2011, literally, I had to go to about 30 or 40 banks to find one. Today almost every bank that I walk into, they’re more than happy, they jump up and down, because the mood of the market has changed quite a bit, obviously, around the country.

Joe Fairless: One thing that you mentioned as far as the bank’s footprint – maybe it’s too far out, even if they’re within the same city… Would you recommend identifying your submarket and then looking at the community banks and credit unions within that submarket and going to them first?

Andrew Holmes: I think you hit the nail right on the head. There’s a site that people might be familiar with that they can go to, which is called Bauer Financial. Any state that they live in, they can go to that particular website and look up which are all the small banks in that area.
Whatever community you live in, I would just draw a 10-15-mile radius around it, and then start with the ones that are closest to wherever you’re going to buy properties. Especially if it’s in a B market, a C+ type of market, then the banks that are local in that area, they have depositors from that particular area and they need to make a certain amount of loans in that particular market. So that’s the first place you start.

As you start developing relations, as you start having credibility with a particular bank, they’ll scratch their arms a little bit for you, but in general, the place to start always is the community banks – they wanna have a relationship; it’s a relationship sort of a lending, and they really like that word. If you go in and say, “Hey, we wanna develop a relationship with you” and you tell them that you’re gonna put your rental deposits in their bank, they’re all over that, because that’s really what in the long run they’re looking for. It’s not a one-way street. Especially, we’ve had lenders that have developed relations with us for a long time now.

In 2010 or 2011 when we started accumulating these, they’ve literally in Chicago helped hundreds and hundreds of lenders. They don’t have a [00:14:38].10] stringent criteria. For people who may not have a W-2 income, they’ll work with 1099. If somebody doesn’t have a W-2 or 1099, but has retirement income, they’ll work with it. If somebody doesn’t even have that but has some assets, a good portfolio in the stock market or just cash – they’re much more forgiving and they’re not as sensitive, even in the department of credit scores.
They’re not gonna analyze everything to that debt, and they’re not gonna ask you where did the forefathers come from. We like a traditional, residential bank; every single thing you have to explain. They tend to be very willing to work with you.

Other advantages… As you work with these commercial banks, you can buy properties in your LLCs, you can buy properties in your S Corps, you can buy companies under a trust… Let’s say you bought a property with a partner – at the time of closing, you can [unintelligible [00:15:30].19] over to whatever company you want… There’s a ton of flexibility if you really understand how to work that niche.
That’s been a godsend to us when we found these commercial banks, and there’s tons of them. There’s always a pro and a con to it, and the only con to these is typically these institutions tend to have a limit. They’ll do 3-4 loans for you initially, then they’ll say “Okay, let’s stop. You need to bring in your tax returns and then after February we’ll again start doing more.” Next year they’ll do 7-8, and once you reach a threshold typically of about a million dollars or so (850-900), they’ll kind of put the brakes on, and a lot of times they have a lot of sister banks that they do business with, and if you develop good relations with them, they’ll be happy to refer to you, and your business becomes easier and easier to grow.

Joe Fairless: Outstanding information. Best Ever listeners, the Bauer Financial can be found at BauerFinancial.com. I had not heard of that. I went there, and it’s great. You can search for credit unions in your area. I’m sure you’ve heard me mention this before about what we’re talking about, which are portfolio lenders – community banks and credit unions. They keep the loan in their portfolio, therefore they can be more flexible with the terms, and they don’t sell it on the secondary market like the Bank of America, Wells Fargo, Chase do, typically. It is their own loan, and that’s why they can be more flexible.

You mentioned talking to them about providing a stabilized property, with a tenant. That assumes that you already have the money to buy the property in the first place. What about someone starting out, wanting to implement this strategy? How would you get finance initially? Or do you just need to save up the cash to do so?

Andrew Holmes: No, absolutely not. I’ve never – even today, even though we happen to have obviously a significant amount of accumulated cash, still it can be done three different ways. Number one, you can partner with somebody that has the capital and do a 50/50 joint venture. They buy the property, they put up the money for capital – that’s one way of doing it. Obviously, you’re the driving force, you’re doing all the work, but you’re giving up 50% if the returns. That’s where I started initially.

The second way to do it is the traditional route, which is you borrow money from a hard money lender, and put some of your own money. The third route, which we tend to use the most, and that is understanding — I’m sure on the podcast you’ve talked about private money. Probably that is the biggest bonanza for real estate investors, which is join your local REIOs, join the local groups; whichever town you’re in, there are tons of them. There are people that are willing to make loans out of their IRAs, they have personal money, and you end up paying anywhere from 8% to 12%, and that’s what we tend to do and that’s what we always try to get people to understand – there’s a lot of money out there where people are willing to loan for the front end of the transaction. So that’s a great, great way to start.

Either partner for it, go to a hard money lender… The rates can be rather high there, but my first choice always is private investors.

Joe Fairless: Best Ever listeners, if you are doing a flip, which is not what we’re talking about, or talking about improving it and then holding on to it for the long run – which I like much better than flipping it… But if you are doing a flip and you’re needing cash, then FundThatFlip is a sponsor of the show, and they have opportunities for you on that.

What is your best real estate investing advice ever, Andrew?

Andrew Holmes: I would say this… If you take care of real estate for the first five years, it will take care of you for the rest of your life. Most people screw that up because they don’t build it on the right foundation. Whenever you look at long-term building wealth, you have to learn how to take care of the foundation, which is the first five years. If you take care of that, the rest of your life you’re pretty much set, as long as the first foundation is made properly.

Joe Fairless: I love that philosophy. I love how you started out by talking about the transactional nature initially, and then more of a long-term approach. One other follow-up question about the business model… I mentioned it requires a great lending partner, but then also your ability to find these deals that qualify, so that you do have the ability to take your money back out and roll it into the next one because of that equity. How do you find those deals?

Andrew Holmes: We find the deals in three places. In Chicago about 15% of the market is still just sales. That’s down from about 40% if the market, so obviously it’s going in the right direction, stabilizing the market. The last transactions we find with auctions, the Sheriff Sales type of places… We’re still buying quite a bit on the online auctions. Obviously, the MLS, and still in today’s market when there’s multiple bids going on, there’s not as much competition for buy and hold type of properties.

Most people are in the rat race of trying to do a flip, which god bless them, but that’s just not a strategy that we — we do some of those still if there’s a wide margin and it doesn’t fit our rental criteria, we’ll still do a flip, but that’s basically just additional income. That’s not our main focus.

The last place, which is probably the most ignored one, which is probates, free foreclosures… Some sort of distress; a lot of villages have issued fines, out of town homeowners… We have started doing a lot of direct marketing directly to sellers, to find properties that way. We’re looking to do about 80-100 transactions a year, and we have another group of people in Chicago that buys another 200, kind of onesies or twosies, and we’re able to find about 200 deals no problem. Our market is so large, that still that exists as long as you know what your back end numbers are.

The key is to know the numbers, to know the neighborhoods like the back of your hand.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Andrew Holmes: Absolutely.

Joe Fairless: Alright, let’s do it.

Break:[00:22:00].19] to [00:22:55].08]

Joe Fairless: Best ever book you’ve read?

Andrew Holmes: Rich Dad, Poor Dad.

Joe Fairless: Best ever deal you’ve done?

Andrew Holmes: Bought it for $12,000, and we keep it, and it’s worth over $150,000.

Joe Fairless: Where did you get the lead?

Andrew Holmes: Actually I got while driving for DOMs.

Joe Fairless: You’re driving around and you see a distressed property, and then you look up the owner and you call the owner? Or how did it work?

Andrew Holmes: I was driving around, I saw a really bad driveway, windows were all messed up; it looked like a house that clearly was distressed, so I called the owner and he said, “Well, it’s going to auction, and I want nothing to do with the property.” We approached the owner and we paid him 2,000, paid off the $10,000 mortgage and that was the end of the story.

Joe Fairless: What would be the incentive for him to sell it for $2,000 out of pocket?

Andrew Holmes: He had already moved out of town. The village had put a whole bunch of [unintelligible [00:23:52].28] on the property, so they would not negotiate with them. When we went to them, they were like “As long as you can give us an affidavit and a $10,000 deposit, the property would be brought up to code as per our requirements. We will renegotiate all the liens, all the things that they had put on it. It was only a $900 ticket. In Chicago in some places the charge is $7,000/day for violations, because they don’t want boarded up properties.

So we negotiated with the village. He just thought that it was an impossible thing to solve. He should have hired an attorney and rework the whole thing, but he just didn’t know what he didn’t know, and he was out of town.

Joe Fairless: Best ever way you like to give back?

Andrew Holmes: I think the best ever way I like to give back is share what we know, because the more that I share, the more openly information is shared, the more we get to grow; a lot of times people hold this belief, “Why would you share so openly?” I’ve always laughed, that every time I share, I get back so many more folds, because people give back in ways they don’t even know. The best way of learning is to teach others to do it.

Joe Fairless: What’s the biggest mistake you’ve made on a deal?

Andrew Holmes: Getting greedy and not trusting your gut instinct when it says no. It doesn’t matter how good it sounds, pass.

Joe Fairless: And lastly, what’s the best place that Best Ever listeners can get in touch with you?

Andrew Holmes: They can reach us at info@ChicagoCashflow.com.

Joe Fairless: And Best Ever listeners, the .com URL is in the show notes page. You can just click through and go check out the website and get in touch with Andrew and his team.

Andrew, thanks for being on the show, talking about how you and your company are buying 200 properties a year in Chicago. The long-term approach — not transactional, the long-term buy and hold approach of finding a property that is distressed or undervalued, increasing the value by forcing appreciation through renovations or talking to the city, getting the liens dismissed or paying a nominal fee to get certain things taken care of, and then going to a portfolio lender, putting that loan under the portfolio, and then recycling that money into the next deal and then paying that off over the term with the cash out proceeds from these new deals.

One question I have – to pay off the deal on the five-year balloon, are you simply paying that off from money from a previous deal? Is that how you do it?

Andrew Holmes: No, so the deal is that you accumulate fives. On an average, if you accumulate five, with the numbers that we do, you’re gonna have about $3,000 cash flow a month. So you start attacking the mortgage number one. Let’s say it takes you a year to accumulate five properties; you wait for about three months, build a reserve, and then after the fourth month you take the cash flow income from all five properties, attack property number one. That’s gonna take about two, two-and-a-half years (with our numbers) to pay off. The second property is gonna take about 19 months, the third property is gonna take about 13 months, and so on and so forth, depending on how quick you pick them.

That’s the reason why the five number is critical. If you do a proper rehab, appropriate for the next 5-7 years, put tenants on a 2-3 year lease minimum. It won’t work if you sign one-year leases, because you want stability for the long term, you don’t want tenant turnover at all. It’s okay to get a little bit less rent, but what you’re really looking for is a high-quality tenant so that you don’t have any downtime as much as possible.

Then you’re using property cash flow from five properties to pay off number one, then it builds, then you pay number two, number three, so on and so forth.

Joe Fairless: That makes sense. Thank you so much for being on the show, Andrew. I hope you have a best ever day. We’ll talk to you soon.

Andrew Holmes: Joe, I love your podcast. Thank you so much for having me on.

Stop everything and press play, you are about to hear a method of making offers with a slight contingency, but it’s all about the numbers. Our guest house hacked his way to freedom and has never done an off market deal, hear how he did it!

– Real Estate Broker & Investor at Dreamtown Realty
– Focus is on 2-20 unit residential and mixed-use properties
– Worked with owner-occupants, first time and seasoned investors and deal syndication on deals large and small
– Master’s Degree in Accounting
– Based in Chicago, Illinois
– Say hi to him at http://www.chicagoREinvestment.com
– Best Ever Book: The Four Hour Work Week by Tim Ferriss

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

– President of Apex Renovations
– President of Chicago Area Real Estate Investors Association
– Buy-and-hold investor with over a decade of experience in residential properties
– Bought his first house while still in school
– Prior to full time investing, he used to sell brain surgery equipment
– Based in Chicago, Illinois
– Say hi to him at http://www.GoApexRenovations.com
– Best Ever Book: The One Thing by Gary Keller

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.